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BEACON ROOFING SUPPLY INC - Annual Report: 2015 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

  Washington, D.C. 20549

 

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended September 30, 2015

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from                                to                                 

 

Commission File Number 000-50924

 

 

 

BEACON ROOFING SUPPLY, INC.

 (Exact name of registrant as specified in its charter)

 

Delaware   36-4173371
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

Address of principal executive offices: 505 Huntmar Park Drive, Suite 300, Herndon, VA 20170

 

Registrant’s telephone number, including area code: (571) 323-3939

 

 

 

Securities registered pursuant to section 12(b) of the Act:

 

 Common Stock, $0.01 par value

  The NASDAQ Global Select Market
(Title of each class)   (Name of each exchange on which registered)

 

Securities registered pursuant to section 12(g) of the Act: None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes x  No ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨  No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x NO ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x Accelerated filer   ¨
Non-accelerated filer    ¨ (do not check if a smaller reporting company) Smaller reporting company  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨  No x

 

The aggregate market value of the voting stock (common stock) held by non-affiliates of the registrant as of the end of the second quarter ended March 31, 2015 was $1,642,909,000

 

The number of shares of common stock outstanding as of November 19, 2015 was 58,907,378.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The information required by Part III (Items 10, 11, 12, 13 and 14) will be incorporated by reference from the Registrant’s definitive proxy statement (to be filed pursuant to Regulation 14A).

 

 

 

 

Table of Contents

BEACON ROOFING SUPPLY, INC.

 

Index to Annual Report

on Form 10-K

 

Year Ended September 30, 2015

 

PART I       1
Item 1.   Business   1
Item 1A.   Risk Factors   11
Item 1B.   Unresolved Staff Comments   13
Item 2.   Properties   13
Item 3.   Legal Proceedings   15
Item 4.   Mine Safety Disclosures   15
         
PART II       16
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   16
Item 6.   Selected Financial Data   18
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   19
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   34
Item 8.   Financial Statements and Supplementary Data   36
Item 9.   Changes In and Disagreements with Accountants on Accounting and Financial Disclosure   64
Item 9A.   Controls and Procedures   64
Item 9B.   Other Information   66
         
PART III       67
         
PART IV       67
Item 15.   Exhibits and Financial Statement Schedules   67

  

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  Forward-looking statements

 

The matters discussed in this Form 10-K that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties, which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “aim,” “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “will be,” “will continue,” “will likely result,” “would” and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance. You should read statements that contain these words carefully, because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other “forward-looking” information.

 

We believe that it is important to communicate our future expectations to our investors. However, there are events in the future that we are not able to accurately predict or control. The factors listed under Item 1A, Risk Factors, as well as any cautionary language in this Form 10-K, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Although we believe that our expectations are based on reasonable assumptions, actual results may differ materially from those in the forward looking statements as a result of various factors, including, but not limited to, those described under Item 1A, Risk Factors and elsewhere in this Form 10-K.

 

Forward-looking statements speak only as of the date of this Form 10-K. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this Form 10-K, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this Form 10-K or that may be made elsewhere from time to time by or on behalf of us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

 

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PART I

 

ITEM 1.    BUSINESS

 

Overview

 

We are the largest publicly traded distributor of residential and non-residential roofing materials in the United States, with leading positions in key metropolitan markets in both the United States and Canada. We also distribute other complementary building materials, including siding, windows, and waterproofing systems for residential and non-residential building exteriors. Beacon purchases products from a large number of manufacturers and then distributes these goods to a customer base consisting of contractors, and to a lesser extent, general contractors, home builders, retailers, and building materials suppliers. As of September 30, 2015, we operated 274 branches in 42 states throughout the United States and six provinces in Canada. We stock one of the most extensive assortments of high quality branded products in the industry with approximately 2,000 to 11,000 SKUs per branch available in inventory, enabling us to deliver products to serve nearly 53,000 customers on a timely basis. On October 1, 2015, we acquired Roofing Supply Group, LLC (“RSG”), a leading roofing products distributor owned by an investment partnership controlled by Clayton, Dubilier & Rice, LLC and employee stockholders, in a cash and stock transaction valued at approximately $1.1 billion. Headquartered in Dallas, Texas, RSG distributes roofing supplies and related materials from 83 locations across 24 states, including the key Western and Southern markets of California, Florida, Texas, and the Pacific Northwest with branches in Seattle and Spokane.

 

For the fiscal year ended September 30, 2015 (“fiscal year 2015” or “2015”), residential roofing products comprised 49% of our sales, non-residential roofing products accounted for 35% of our sales, and siding, waterproofing systems, windows, and other exterior building products provided the remaining 16% of our sales. Approximately 93% of our net sales were in the United States.

 

We also provide our customers a comprehensive array of value-added services, including:

 

·Advice and assistance to contractors throughout the construction process, including product identification, specification and technical support;

 

·Job site delivery, rooftop loading and logistical services;

 

·Tapered insulation design and layout services;

 

·Metal fabrication and related metal roofing design and layout services;

 

·Trade credit; and

 

·Marketing support, including project leads for contractors.

  

We believe the additional services we provide strengthen our relationships with our customers and distinguish us from our competition. The vast majority of orders require at least some of these services. Our ability to provide these services efficiently and reliably can save contractors time and money. We also believe that our value-added services enable us to achieve attractive gross profit margins on our product sales. We have earned a reputation for a high level of product availability and experienced and professional employees who provide high-quality service, including timely, accurate and safe delivery of products.

 

Our diverse customer base generally includes a significant portion of the residential and non-residential roofing contractors in most of the markets in which we operate. These roofing contractors are typically involved on a local basis in the replacement, or re-roofing, component of the roofing industry. We utilize a branch-based operating model in which branches maintain local customer relationships but benefit from our centralized functions such as information technology, marketing, accounting, financial reporting, credit, purchasing, legal and tax services. This business model allows us to provide customers with specialized products and personalized local services tailored to a geographic region, while benefiting from the resources and scale efficiencies of a national distributor.

 

We have achieved our growth through a combination of 29 strategic and complementary acquisitions since our initial public offering in 2004, opening new branch locations and broadening our product offering. In 2015, we acquired eight branches and opened six new branches. We have grown from $652.9 million in sales in fiscal year 2004 to $2.515 billion in sales in fiscal year 2015, which represents an eleven-year compound annual growth rate of 13.0%.  Our organic growth, which includes growth from existing and newly opened branches but excludes growth from acquired branches, averaged 5.5% per annum over the same period. Acquired branches are excluded from organic growth measures until they have been under our ownership for at least four full fiscal quarters at the start of the reporting period. During this period, we opened 73 new branch locations (of which we have only closed seven), while our existing market sales excluding greenfields increased an average of 1.7% per annum. Existing market sales excluding greenfields are defined as the aggregate sales from branches open for the entire comparable annual periods. Income from operations has increased from $34.7 million in fiscal year 2004 to $117.1 million in fiscal year 2015, which represents an eleven-year compound annual growth rate of 13.0%. We believe that our proven business model can continue to deliver industry-leading growth and operating profit margins.

 

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Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website at www.becn.com as soon as reasonably practical after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission. 

 

History

 

Our predecessor, Beacon Sales Company, Inc., was founded in Charlestown, Massachusetts (part of Boston) in 1928. In 1984, Beacon operated three distribution facilities and generated approximately $16 million in annual revenue. In 1997, Beacon Sales Company had grown to seven branches in the New England region and generated approximately $72 million of annual revenue, primarily from the sale of non-residential roofing products. Since 1997, we have executed 35 strategic and complementary acquisitions and opened 83 new branches (of which we only closed nine). We have also expanded our product offerings to offer more residential roofing products and complementary exterior building materials and related services. Our strategic acquisitions, new branch openings, and product line extensions have increased the diversity of both our customer base and our local market focus, while generating cost savings through increased purchasing power and lower overhead expenses as a percentage of net sales. We completed an initial public offering (“IPO”) and became a public company in September 2004, and completed a follow-on stock offering in December 2005.

 

We were incorporated in Delaware in 1997. Our principal executive offices are located at 505 Huntmar Park Drive, Suite 300, Herndon, Virginia 20170 and our telephone number is (571) 323-3939. Our Internet website address is www.becn.com.

 

Industry Overview

 

According to a biannual industry study published in June 2015 by the international business research company, The Freedonia Group (‘‘Freedonia’’), the total United States roofing market (measured by sales at the manufacturers’ level) was estimated to be valued at approximately $16.8 billion in sales in 2014. Beacon management estimates that the total U.S. roofing market, when measured by sales at the distribution level, was approximately $20 billion in sales in 2014, taking into account Beacon’s historical gross product sales margin as applied to the Freedonia data.

 

Roofing demand (measured by sales at the manufacturers’ level) in the United States is projected to grow 5.0% annually through 2019 to $21.4 billion, according to Freedonia. This would represent a rebound from the 2009 − 2014 period, with growth expected to be driven by both residential and non-residential building construction activity. 

 

The United States roofing market can be separated into two categories: the residential roofing market and the non-residential roofing market. The residential roofing market accounted for approximately 55% of the total United States market by unit volume in 2014. Through 2019, residential roofing construction in dollars is expected to grow at 6.9% annually which is faster than Freedonia’s non-residential roofing demand (in dollars) estimated growth rate of 3.6%, as new residential construction is projected to continue to recover from the low levels experienced from the 2007-2009 recession and its aftermath. Because residential roofing market growth is currently expected to exceed non-residential roofing market growth, demand for steep-slope roofing is expected to rise more rapidly than for low-slope products.

 

Traditionally, over 75% of expenditures in the United States roofing market are for re-roofing projects, with the balance being for new construction. In 2014 re-roofing projects accounted for approximately 81% of roofing demand (in dollars). Historically, we estimate that approximately 75 − 80% of our revenues have related to re-roofing. According to the National Association of Home Builders, approximately 94% of re-roofing demand in the United States is non-discretionary, with owners forced to invest in repairs to respond to unforeseen circumstances. For example, because of the depressed level of new construction and damage caused by Hurricane Sandy and other storms, re-roofing activity represented over 85% of the expenditures for roofing in the United States in 2012. Re-roofing projects are generally considered maintenance and repair expenditures and are less likely than new construction projects to be postponed during periods of recession or slow economic growth. As a result, demand for roofing products has historically been less volatile than overall demand for construction products.

 

Net sales from re-roofing are also expected to increase as the median age of owner occupied housing has increased from 23 years in 1985 to 38 years in 2013, according to U.S. Census data. As homes age, new and re-roof demand increases as homeowners are forced to replace or repair old, deteriorating roofs. Furthermore, U.S. asphalt shingle volume has remained meaningfully below its long-term average of 135 million square feet since 2009 according to the Asphalt Roofing Manufacturers Association. The aging U.S. housing stock, combined with below average roofing shingle volumes, supports a favorable supply/demand dynamic in the residential repair and remodel market in the coming years.

 

Regional variations in economic activity influence the level of demand for roofing products across the United States. Of particular importance are regional differences in the level of new home construction and renovation. Demographic trends, including population growth and migration, contribute to the regional variations through their influence on regional housing starts and existing home sales.

 

In addition to our operations with the United States, we also operate in six provinces in Canada, which in total represent approximately 7.3% of our total revenues.  We expect overall demand for operations in Canada to grow at rate similar to our United States operations.

 

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Roofing distributors

 

Wholesale distribution is the dominant distribution channel for both residential and nonresidential roofing products. Wholesale roofing product distributors serve the important role of facilitating the purchasing relationships between roofing materials manufacturers and thousands of contractors. Wholesale distributors can maintain localized inventories, extend trade credit, give product advice and provide delivery and logistics services.

 

Despite some recent consolidation, the roofing materials distribution industry remains highly fragmented. The industry is characterized by a large number of small and local regional participants. The vast majority of our competition comes from local and regional roofing supply distributors, and, to a much lesser extent, other building supply distributors and ‘‘big box’’ retailers. Among distributors, we compete against a small number of large distributors and many small and local privately-owned distributors. As a result of their small size, many of these distributors lack the corporate, operating and IT infrastructure required to compete effectively.

 

Residential roofing market

 

Within the residential roofing market, the re-roofing market is currently more than four times the size of the new roofing market, accounting for approximately 80% of the residential roofing unit demand in 2014 compared to a historic long-term rate of about 79%, according to Freedonia

 

Asphalt shingles dominate the residential roofing market, with an approximate 84% share, and historically have had an expected average useful life of 15 to 20 years. Freedonia estimates that residential roofing construction (in dollars) is expected to grow at 9.3% annually through 2019.

 

A number of other factors can also generate re-roofing demand, including one-time weather damage and homeowners looking to upgrade their homes. In addition, sales of existing homes can affect re-roofing demand, as some renovation decisions are made by sellers preparing their houses for sale and others are made by new owners within the first two years of occupancy.

 

Within the new construction portion of the residential roofing market, growth has historically been driven by housing starts, together with larger average roof sizes. Demand for roofing installed in new residential construction and additions to existing structures is forecast to grow over 11% annually to 39.5 million squares in 2019. While such projected growth represents an acceleration from the growth seen between 2009 and 2014, new residential demand for roofing in that period will not be at the level seen in 2004, indicative of the steep decline in housing starts from their elevated base in that year and subsequent moderate recovery. Total housing starts of approximately 1.0 million in 2014 remains below the long-term average of 1.5 million. However, growth in housing starts since 2009 indicates that the residential market is in the early stages of a potentially significant cyclical recovery.

 

Non-residential roofing market

 

Non-residential roofing construction (in dollars) is forecast by Freedonia to grow 6.0%, per year through 2019. Gains are expected to be driven by non-residential new construction, which is expected to see 6.6% annual gains in unit demand during that time, as non-residential building construction expenditures rebound from their low 2014 level. The office and commercial construction segment are expected to experience the most rapid gains if construction expenditures in that market rise sharply as currently anticipated.

 

Historically, re-roofing projects have accounted for approximately 81% of non-residential roofing demand (in dollars). In 2014, re-roofing projects represented nearly 80% of the total non-residential demand. As with residential re-roofing, non-residential re-roofing activity tends to be less cyclical than new construction and depends, in part, upon the types of materials on existing roofs, their expected lifespan and intervening factors such as wind or water damage.

 

The non-residential roofing market includes an office and commercial market, an industrial market, and an institutional market. Office and commercial roofing projects represent the single largest component of the non-residential roofing market in 2014 at 49% of demand (in dollars) in 2014, according to Freedonia. Industrial roofing projects represent 26% of non-residential roofing product sales (in dollars), while institutional projects and others make up the remaining 25% of non-residential roofing demand (in dollars).

 

Complementary building products

 

Demand for complementary building products such as siding, windows and doors for both the residential and non-residential markets has been at historically low levels in recent years, consistent with the downturns in the new construction markets and in the overall economy. Unlike the roofing industry, demand for these products is more discretionary and influenced much greater by the new construction markets.

 

These complementary products are a major component of the overall building products market. The United States siding market was estimated to be approximately $8.5 billion in 2014, while the United States window and door industry was estimated to be approximately $24.4 billion in 2014, according to the most recent information available from Freedonia. Both of these markets have been negatively impacted by the low level of new housing starts in recent years, but are estimated by Freedonia to grow at an annual rate (in dollars) of approximately 9% for the siding market and 5% for the window and door industry through 2018.

 

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Our Strengths

 

We believe the sales and earnings growth we have achieved over time has been and will continue to be driven by our primary competitive strengths, which include the following:

 

·Leading roofing distribution platform with national scope combined with regional expertise.     We are the second largest (and largest publicly traded) distributor of residential and non-residential roofing materials in the United States, with leading positions in key metropolitan markets in both the United States and Canada. Our geographic footprint is designed to provide advantages in the regional markets we serve. We utilize a branch-based operating model whereby branches cultivate and maintain local customer relationships while benefiting from centralized functions such as information technology, marketing, accounting, financial reporting, credit, purchasing, human resources, legal and tax services. We provide our customers with specialized products and personalized local services tailored to a geographic region, with the resources and scale efficiencies of a national distributor.

 

·Diversified business model with recurring re-roofing demand.     We believe that our business has historically been protected in times of economic downturn because of the non-discretionary nature of most re-roofing demand; the mix of our sales between residential and non-residential products; our geographic and customer diversity; and the financial and operational ability to expand our business and obtain market share. We have a long history of organic revenue growth and healthy gross margins through a variety of economic cycles. Over the last ten fiscal years, our revenues have increased by a compound annual growth rate (‘‘CAGR’’) of 11.4%, (including growth through acquisitions) and our gross margins in existing markets (i.e., excluding acquisitions) have averaged approximately 24%.

 

·Well-positioned in attractive roofing demand markets. We believe that our national distribution platform is strategically positioned to benefit from a North American market recovery, and we expect that improving economic conditions and continued recovery in residential and non-residential construction activity will drive additional roofing demand.

 

·Superior customer service to well established, long-term customer base.     Our diverse customer base consists of nearly 53,000 contractors, home builders, building owners, and other resellers. A significant number of our customers have relied on us (or our predecessors) as their vendor of choice for decades, and we believe that these strong customer relationships cannot easily be replicated. No single customer accounts for more than 2% of revenues.

 

We believe that the services provided by our employees improve our customers’ efficiency and profitability, which, in turn, strengthens our customer relationships. We consider customer relations and our employees’ knowledge of roofing and exterior building materials to be very important to our ability to increase customer loyalty and maintain customer satisfaction. We invest significant resources in training our employees in sales techniques, management skills and product knowledge. As such, our sales personnel possess in-depth knowledge of roofing materials and applications and are capable of providing technical advice and assistance to contractors throughout the re-roofing and construction process.

 

We provide a number of value-added services to our customers. In particular, we support our customers with: advice and assistance on product identification, specification and technical support; timely job site delivery, rooftop loading and logistical services; tapered insulation design and related layout services; metal fabrication and related metal roofing design and layout services; trade credit; and marketing support, including project leads for contractors.

 

·Strong platform for growth and acquisition.     Over the period from 1997 through 2015, we increased revenue at rates well in excess of the overall growth in the roofing materials distribution industry. We have expanded our business through strategic acquisitions, new branch openings, and the diversification of our product offering. We have generally improved the financial and operating performance of our acquired companies and helped them to grow their businesses following acquisition. ,

 

·Strong cash flow generation driven by stable business model. From the fiscal year ended September 30, 2010 through the year ended September 30, 2015, we have increased our revenue by a CAGR of 9.3%, which included existing market growth as well as growth through acquisitions. We have also increased its revenue in eight of the last ten fiscal years. Our track record of growth combined with limited capital expenditure requirements has resulted in strong free cash flow across economic cycles. This cash flow generation allowed Beacon to reduce its debt from $337 million as of September 30, 2010 to $222 million as of September 30, 2015, while growing from 179 branches to 274 over the same time period.

 

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·Sophisticated IT platform.     All of our locations, except for one fabrication facility, operate on the same management information systems. We have made a significant investment in our information systems, which we believe are among the most advanced in the roofing distribution industry. These systems provide us with a consistent platform across all of our operations and help us to achieve operating efficiencies in purchasing, pricing and inventory management and a high level of customer service. Our systems have substantial capacity to handle our future growth plans without requiring significant additional investment.

 

·Industry-leading management team with a track record of integration.     We believe that our key personnel, including branch managers, regional vice presidents and executive officers, are among the most experienced members of the roofing industry, and have a track record of achieving strong revenue growth and delivering profitability through various industry and economic cycles, including the recent housing crisis. Since Beacon became a publicly traded company in 2004, the Beacon management team has successfully completed and integrated 29 acquisitions and opened 73 new greenfield locations. Beacon’s senior management team has approximately 170 years of combined experience in our industry and other relevant professional experience.

 

Growth Strategies

 

Our objective is to be the preferred supplier of roofing and other exterior building product materials in the United States and Canadian markets while continuing to increase our revenue base and maximize our profitability. We plan to attain these goals by executing the following strategies:

 

·Expand product offering and increase cross-selling activities. Due to the unique characteristics of each geographic region, our local customers typically require market specific product offerings. Although we believe we have one of the most extensive offerings of high-quality branded products in the industry with approximately 2,000 to 11,000 SKUs per branch available in inventory, we have branches that are underrepresented in some product categories, which create an opportunity to cross-sell additional products through our existing branch network. In particular, we seek to expand non-residential roofing sales into markets where Beacon currently sells mostly residential roofing. In addition, we work closely with customers and suppliers to identify new products and services, and continue to expand our product offering to include complementary building materials such as windows, siding, doors, waterproofing systems, insulation and metal fabrication.

 

·Continue to provide exceptional customer service and roofing expertise. We provide a comprehensive array of high-quality products and we believe we offer value-added services, including job site delivery, tapered insulation layouts and design metal fabrication to residential and non-residential roofing contractors reliably, accurately and on time. For example, in fiscal year 2014, we were able to support our customers by fulfilling over 97% of warehouse orders through our in-stock inventory as a result of the breadth and depth of the inventory maintained at our local branches. We believe that our focus on providing both value-added services and accurate and rapid order fulfillment enables us to attract and retain customers.

 

·Selectively pursue opportunities for organic growth and strategic acquisitions. Acquisitions and greenfield expansion is an important component of our growth strategy. We believe that there will be meaningful opportunities to further expand or intensify our geographic focus in contiguous or existing regions. We intend to continue to pursue our growth strategy while focusing on maintaining a strong balance sheet.

 

Since 2004 Beacon has opened 73 new branches through greenfield expansion. Beacon has a disciplined approach to new branch openings and its typical strategy is to open branches: (1) within its existing markets; (2) where existing customers have expanded into new markets; or (3) in areas that have limited or no acquisition candidates and are a good fit with its business model and culture.

 

Since 2004 Beacon has completed 29 acquisitions. We believe that the roofing distribution sector remains fragmented and that there are significant opportunities to further grow our business through disciplined, strategic acquisitions. With only a few large, well-capitalized competitors in the industry, we believe we can continue to build on our distribution platform by successfully acquiring additional roofing materials distributors. Our main acquisition strategy is to target market leaders in geographic areas that we do not service or that complement our existing operations in an area.

 

·Enhance margins and free cash flow generation through continued execution of our growth strategy. We believe that as recent greenfield locations continue to ramp up, and if expected synergies and cost savings from acquisitions are realized, our margins will continue to improve. We also believe that we have an operating model that requires minimal capital, which, when combined with stable re-roofing demand, will position us for strong free cash flow generation. Since fiscal year 2010, we completed 13 acquisitions, which added 55 branches and opened 49 new branches through greenfield expansion. We intend to continue to use cash flows to support deleveraging and our continued platform growth.

 

We have invested heavily in our branch expansion by opening 42 new branches from October 1, 2012 through September 30, 2015, including 26 new branch openings during fiscal year 2014. While management estimates that our branch expansion strategy over the past several years has resulted in average upfront operating costs and capital expenditures of approximately $600 thousand to $1 million per new branch, we believe these new branches will increase their contribution to our profitability and cash flow as they mature.

 

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Products and Services

 

Products

 

The ability to provide a broad range of products is essential to success in roofing materials distribution. We carry one of the most extensive arrays of high-quality branded products in the industry, enabling us to deliver a wide variety of products to our customers on a timely basis. We are able to fulfill the vast majority of our warehouse orders with inventory on hand because of the breadth and depth of the inventories at our branches.

 

Our product portfolio includes residential and non-residential roofing products as well as complementary building products such as siding and windows. Our product lines are designed to meet the requirements of both residential and non-residential roofing contractors.

 

Product Portfolio

Residential

Roofing Products

 

Non-Residential

Roofing Products

 

Complementary

Building Products

Asphalt shingles   Single-ply roofing   Siding   Windows/Doors
Synthetic slate and tile   Asphalt   Vinyl siding   Vinyl windows
Clay tile   Metal   Cedar siding   Aluminum windows
Concrete tile   Modified bitumen   Fiber cement siding   Wood windows
Slate   Build-up roofing   Soffits   Wood doors
Nail base insulation   Cements and coatings   House wraps   Patio doors
Metal roofing   Insulation – flat stock & tapered   Vapor barriers   Skylights
Felt     Stone veneer    
Wood shingles and shakes   Commercial fasteners        
Nails and fasteners   Metal edges and flashings   Other   Specialty Lumber
Metal edgings and flashings   Sky lights, smoke and roof hatches   Water proofing   Redwood
    Building insulation   Red cedar decking
Prefabricated flashings   Sheet metal (copper, aluminum and steel)   Air barrier systems   Pressure treated lumber
Ridges and soffit vents     Gypsum   Fire treated plywood
Gutters and downspouts   Other accessories   Moldings   Synthetic decking
Other accessories       Patio covers   PVC trim boards
        Cultured stone   Synthetic
            Millwork
            Custom millwork

 

The products that we distribute are supplied by the industry’s leading manufacturers of high-quality roofing materials and related products, such as Building Products of Canada, Carlisle Syntec, CertainTeed Roofing, CertainTeed Siding, Firestone Building Products, GAF, InterWrap, James Hardie Building Products, Johns Manville Roofing, Mid-States Asphalt, Owens Corning Roofing, PlyGem, Soprema, and Tamko Building Products.

 

In the residential market, asphalt shingles comprise the largest share of the products we sell. We distribute products such as high-end shingles, gutters and metal roofing products, and tile roofing. Additionally, we distribute downspouts, tools, nails, vinyl and fiber cement siding, windows, decking and related exterior shelter products to meet the expansive needs of our customers.

 

In the non-residential market, single-ply roofing systems and the associated insulation products comprise the largest share of our product offering. Our single-ply roofing systems consist primarily of Ethylene Propylene Diene Monomer (synthetic rubber) or “EPDM” and Thermoplastic Olefin or “TPO”, along with other roofing materials and related components. In addition to the broad range of single-ply roofing components, we sell asphaltic membranes and the insulation required in most non-residential roofing applications, such as tapered insulation. Our remaining non-residential products include metal roofing and flashings, fasteners, fabrics, coatings, roof drains, modified bitumen, built-up roofing and asphalt.

 

 6 

 

 

Services

 

We emphasize superior value-added services to our customers. We employ a knowledgeable staff of salespeople. Our sales personnel possess in-depth knowledge of roofing materials and applications and are capable of providing technical advice and assistance to contractors and other customers throughout the re-roofing and construction process. In particular, we support our customers with the following value-added services:

 

·advice and assistance on product identification, specification and technical support, and training services;

 

·a large, service ready fleet with a broad footprint supporting timely job site delivery, rooftop loading and logistical services;

 

·tapered insulation engineered with enhanced computer-aided design and related layout services;

 

·metal fabrication and related metal roofing design and layout services;

 

·trade credit; and

 

·marketing support, including project leads for contractors.

 

Customers

 

Our diverse customer base consists of nearly 53,000 contractors, home builders, building owners, and other resellers primarily in the Northeast, Mid-Atlantic, Midwest, Central Plains, West, South and Southwest regions of the United States and across Canada. Our typical customer base varies by end market, with relatively small contractors in the residential market and small to large-sized contractors in the non-residential market. To a lesser extent, our customer base in a market can include general contractors, retailers and building materials suppliers.

 

As evidenced by the fact that a significant number of our customers have relied on us or our predecessors as their vendor of choice for decades, we believe that we have strong customer relationships that our competitors cannot easily displace or replicate. No single customer accounts for more than 2% of our revenues.

 

Sales and Marketing

 

Sales strategy

 

Our sales strategy is to provide a comprehensive array of high-quality products and superior value-added services to residential and non-residential roofing contractors reliably, accurately and on time. We fulfill approximately 97% of our warehouse orders through our in-stock inventory as a result of the breadth and depth of our inventory maintained at our local branches. We believe that our focus on providing both superior value-added services and accurate and rapid order fulfillment enables us to attract and retain customers.

 

Sales organization

 

We have attracted and retained an experienced sales force of approximately 1,300 personnel who are responsible for generating revenue at the local branch level. The expertise of our salespeople helps us to increase sales to existing customers and add new customers.

 

Each of our branches is headed by a branch manager, who also functions as the branch’s sales manager. In addition, each branch generally employs one to four outside salespeople and one to five inside salespeople who report to their branch manager. Branches that focus primarily on the residential market typically staff a larger number of outside salespeople.

 

The primary responsibilities of our outside salespeople are to prospect for new customers and increase sales to existing customers. One of the ways our outside salespeople accomplish these objectives is by reviewing information from our proprietary LogicTrack software system, which extracts job and bid information from construction reports and other industry news services. The system extracts information on construction projects in our local markets from those industry services. Once a construction project is identified, our design and estimating team creates job quotes, which, along with pertinent bid and job information, are readily available to our salespeople through LogicTrack. Our outside salespeople then contact potential customers in an effort to solicit their interest in participating with us in the identified project. Throughout this process, LogicTrack maintains a record of quoting activity, due dates, and other data to allow tracking of the projects and efficient follow-up. By seeking a contractor to “partner with” on a bid, we increase the likelihood that such contractor will purchase their roofing materials and related products from us in the event that the contractor is selected for the project.

 

To complement our outside sales force, we have built an experienced and technically proficient inside sales staff that provides vital product expertise to our customers. Our inside sales force is responsible for fielding incoming orders, providing pricing quotations and responding to customer inquiries.

 

 7 

 

 

In addition to our outside and inside sales forces, we represent certain manufacturers for particular manufacturers’ products. Currently, we have developed relationships with Carlisle on this basis and employ representatives who act as liaisons (on behalf of property owners, architects, specifiers and consultants) between these roofing materials manufacturers and professional contractors.

 

Marketing

 

In order to capitalize on established customer relationships and locally developed brands, we have maintained the trade names of most of the businesses that we have acquired. These trade names—such as Alabama Roofing Supply, All Weather Products, Applicators Sales & Service, Beacon Roofing Supply Canada Company, Beacon Sales, Best Distributing, Cassady Pierce, Coastal Metal Service, Construction Materials Supply, Dealers Choice, Enercon Products, Entrepot de la Toiture, Ford Wholesale Company, Groupe Bédard, JGA Beacon, McClure Johnston, Lafayette Wood Works, Mississippi Roofing Supply, North Coast Roofing Systems, Pacific Supply, Posi-Pentes, Posi-Slope, Procoat Systems, Quality Roofing Supply, Roof Depot, Southern Roof Center, Structural Materials, The Roof Center, West End Roofing, Wholesale Roofing Supply— are well-known in the local markets in which the respective branches compete and are associated with high-quality products and customer service.

 

As a supplement to the efforts of our sales force, each of our branches communicates with residential and non-residential contractors in their local markets through newsletters, direct mail, social media and the Internet. In order to build and strengthen relationships with customers and vendors, we offer exclusive promotions and sponsor our own regional trade shows, which feature general business and roofing seminars for our customers and product demonstrations by our vendors. In addition, we attend numerous industry trade shows throughout the regions in which we compete, and we are an active member of the National Roofing Contractors Association, as well as certain regional contractors’ associations.

 

Purchasing and Suppliers

 

Our status as a leader in our core geographic markets, as well as our reputation in the industry, has allowed us to forge strong relationships with numerous manufacturers of roofing materials and related products, including Building Products of Canada, Carlisle Syntec, CertainTeed Roofing, CertainTeed Siding, Firestone Building Products, GAF, InterWrap, James Hardie Building Products, Johns Manville Roofing, Mid-States Asphalt, Owens Corning Roofing, PlyGem, Soprema, and Tamko Building Products.

 

We are viewed by our suppliers as a key distributor due to our industry expertise, past growth and profitability, significant market share, financial strength, and the substantial volume of products that we distribute.

 

We manage the procurement of products through our national headquarters and regional offices, allowing us to take advantage of both our scale and local market conditions. We believe this enables us to purchase products more economically than most of our competitors. Product is shipped directly by the manufacturers to our branches or customers.

 

Operations

 

Facilities

 

Our network of 274 branches as of September 30, 2015 serves metropolitan areas in 42 states and six Canadian provinces. This network has enabled us to effectively and efficiently serve a broad customer base and to achieve a leading market position in each of our core geographic markets.

 

Operations

 

Our branch-based model provides each location with a significant amount of autonomy to operate within the parameters of our overall business model. Operations at each branch are tailored to meet local customer needs. Depending on the market, our branches carry approximately 2,000 to 11,000 SKUs.

 

Branch managers are responsible for sales, pricing and staffing activities, and have full operational control of customer service and deliveries. We provide our branch managers with significant incentives that allow them to share in the profitability of their respective branches as well as in the company as a whole. Personnel at our regional and corporate operations assist the branches with, among other things, procurement, credit and safety services, fleet management, information systems support, contract management, accounting, treasury and legal services, human resources, benefits administration and sales and use tax services.

 

Distribution fulfillment process

 

Our distribution fulfillment process is initiated upon receiving a request for a contract job order or direct product order from a contractor. Under a contract job order, a contractor typically requests roofing or other construction materials and technical support services. The contractor discusses the project’s requirements with a salesperson and the salesperson provides a price quotation for the package of products and services. Subsequently, the salesperson processes the order and we deliver the products to the customer’s job site.

 

 8 

 

 

Fleet

 

Our distribution infrastructure supports nearly 740,000 deliveries annually. To accomplish this, we maintained a dedicated owned fleet of 910 straight trucks, 318 tractors and 625 trailers as of September 30, 2015. Nearly all of our delivery vehicles are equipped with specialized equipment, including 1,109 truck-mounted forklifts, cranes, hydraulic booms and conveyors, which are necessary to deliver products to rooftop job sites in an efficient and safe manner and in accordance with our customers’ requirements.

 

Our branches typically focus on providing materials to customers who are located within a two-hour radius of their respective facilities. Our branches generally make deliveries each business day.

 

Management information systems

 

We have fully integrated management information systems across our locations. Acquired businesses are moved to our IT platform as soon as feasible following acquisition. Our systems support every major internal operational function, except payroll, providing complete integration of purchasing, receiving, order processing, shipping, inventory management, sales analysis and accounting. The same databases are shared within the systems, allowing our branches to easily acquire products from other branches or schedule deliveries by other branches, greatly enhancing our customer service. Our systems also include a sophisticated pricing matrix which allows us to refine pricing by region, branch, customer and customer type, or even a specific customer project. In addition, our systems allow us to centrally monitor all branch and regional performance as often as daily. We have centralized many functions to leverage our growing size, including accounts payable, insurance, payroll, employee benefits, vendor relations, and banking.

 

All of our branches are connected to a common computer network via secure Internet connections or private data lines. We maintain redundant systems with transactional data getting replicated throughout each business day. We have the capability of electronically switching our operations to the disaster recovery system.

 

We place purchase orders electronically with some of our major vendors. The vendors then transmit their invoices electronically to us. Our system automatically matches these invoices with the related purchase orders and then schedules the associated payment. We also have the capability to handle customer processing electronically, although most customers prefer ordering via other methods.

 

We scan or receive many financial, credit and other documents into a database for purposes of internal approvals, online viewing and auditing. Additionally, we established an Internet portal that allows customers to access their invoice history and make online payments.

 

Government Regulations

 

We are subject to regulation by various federal, state, provincial and local agencies. These agencies include the Environmental Protection Agency, Department of Transportation, Interstate Commerce Commission, Occupational Safety and Health Administration and Department of Labor and Equal Employment Opportunity Commission. We believe we are in compliance in all material respects with existing applicable statutes and regulations affecting environmental issues and our employment, workplace health and workplace safety practices.

 

In 2012, the United States Supreme Court upheld the majority of the provisions in the Patient Protection and Affordable Care Act (the “Act”). The Act places requirements on employers to provide a minimum level of benefits to employees and assesses penalties on employers if the benefits do not meet the required minimum level or if the cost of coverage to employees exceeds affordability thresholds specified in the Act. The minimum benefits and affordability requirements took effect in 2014. The Act also imposes an excise tax beginning in 2018 on plans whose average cost exceeds specified amounts. We have analyzed the effects on us from the provisions of the Act and we do not currently anticipate a significant financial impact.

 

Competition

 

Although we are one of the two largest roofing materials distributors in the United States and Canada, the United States roofing supply industry is highly competitive. The vast majority of our competition comes from local and regional roofing supply distributors, and, to a much lesser extent, other building supply distributors and “big box” retailers. Among distributors, we compete against a small number of large distributors and many small and local privately-owned distributors. The principal competitive factors in our business include, but are not limited to, the availability of materials and supplies; technical product knowledge and expertise; advisory or other service capabilities; pricing of products; and availability of credit and capital. We generally compete on the basis of the quality of our services, product quality and, to a lesser extent, price.

 

 9 

 

 

Employees

 

As of September 30, 2015, we had 3,366 employees, consisting of 833 in sales and marketing, 464 in branch management, including supervisors, 1,595 warehouse workers, helpers and drivers, and 474 general and administrative personnel. We believe that our employee relations are good. As of September 30, 2015, 28 employees were represented by labor unions.

 

Order Backlog

 

Order backlog is not a material aspect of our business and no material portion of our business is subject to government contracts.

 

Seasonality

 

In general, sales and net income are highest during our first, third and fourth fiscal quarters, which represent the peak months of construction and re-roofing, especially in our branches in the northern and mid-western regions of the United States and in Canada. Our sales are substantially lower during the second quarter, when we usually incur net losses. These quarterly fluctuations have diminished as we have diversified further into the southern and western regions of the United States.

 

We generally experience our peak working capital needs during the third quarter after we build our inventories following the winter season but before we begin collecting on most of our spring receivables. Our principal source of liquidity is our cash and cash equivalents and borrowings under our revolving credit facility, so our borrowings tend to be highest in the third quarter of our fiscal year.

 

Geographic Data

 

For geographic data about our business, please see Note 14 to our Consolidated Financial Statements included elsewhere in this Form 10-K.

 

 10 

 

 

ITEM 1A.    RISK FACTORS

 

You should carefully consider the risks and uncertainties described below and other information included in this Form 10-K in evaluating us and our business. If any of the events described below occur, our business and financial results could be adversely affected in a material way. This could cause the trading price of our common stock to decline, perhaps significantly.

 

We may not be able to effectively integrate newly acquired businesses into our operations or achieve expected cost savings or profitability from our acquisitions.

 

Our growth strategy includes acquiring other distributors of roofing materials and complementary products. Acquisitions involve numerous risks, including:

 

·unforeseen difficulties in integrating operations, technologies, services, accounting and personnel;

 

·diversion of financial and management resources from existing operations;

 

·unforeseen difficulties related to entering geographic regions where we do not have prior experience;

 

·potential loss of key employees;

 

·unforeseen liabilities associated with businesses acquired; and

 

·inability to generate sufficient revenue or realize sufficient cost savings to offset acquisition or investment costs.

 

As a result, if we fail to evaluate and execute acquisitions properly, we might not achieve the anticipated benefits of such acquisitions and we may incur costs in excess of what we anticipate. These risks would likely be greater in the case of larger acquisitions.

 

We may not be able to successfully complete acquisitions on acceptable terms, which would slow our growth rate.

 

The acquisition of other distributors of roofing materials and complementary products is an important part of our growth strategy. We continually seek additional acquisition candidates in selected markets and from time to time engage in exploratory discussions with potential candidates. We are unable to predict whether or when we will be able to identify any suitable additional acquisition candidates, or the likelihood that any potential acquisition will be completed. If we cannot complete acquisitions that we identify on acceptable terms, it is unlikely that we will sustain the historical growth rates of our business.

 

An inability to obtain the products that we distribute could result in lost revenues and reduced margins and damage relationships with customers.

 

We distribute roofing and other exterior building materials that are manufactured by a number of major suppliers. Disruptions in our sources of supply may occur as a result of unanticipated demand or production or delivery difficulties. When shortages occur, roofing material suppliers often allocate products among distributors. Although we believe that our relationships with our suppliers are strong and that we would have access to similar products from competing suppliers should products be unavailable from current sources, any supply shortage, particularly of the most commonly sold items, could result in a loss of revenues and reduced margins and damage relationships with customers.

 

Loss of key personnel or our inability to attract and retain new qualified personnel could hurt our ability to operate and grow successfully.

 

Our success will continue to depend to a significant extent on our executive officers and key management personnel, including our divisional executive vice presidents and regional vice presidents. We do not have key man life insurance covering any of our executive officers. We may not be able to retain our executive officers and key personnel or attract additional qualified management. The loss of any of our executive officers or other key management personnel, or our inability to recruit and retain qualified personnel, could hurt our ability to operate and make it difficult to execute our acquisition and internal growth strategies.

 

A change in vendor pricing and demand could adversely affect our income and gross margins.

 

Many of the products that we distribute are subject to price changes based upon manufacturers’ raw material costs and other manufacturer pricing decisions. For example, as a distributor of residential roofing supplies, our business is sensitive to asphalt prices, which are highly volatile and often linked to oil prices, as oil is a significant input in asphalt production. Shingle prices have been volatile in recent years, partly due to volatility in asphalt prices. Historically, we have generally been able to pass increases in the prices of shingles on to our customers. Although we often are able to pass on manufacturers’ price increases, our ability to pass on increases in costs depends on market conditions. The inability to pass along cost increases could result in lower operating margins. In addition, higher prices could impact demand for these products, resulting in lower sales volumes.

 

 11 

 

 

A change in vendor rebates could adversely affect our income and gross margins.

 

The terms on which we purchase products from many of our vendors entitle us to receive a rebate based on the volume of our purchases. These rebates effectively reduce our costs for products. If market conditions change, vendors may adversely change the terms of some or all of these programs. Although these changes would not affect the net recorded costs of product already purchased, it may lower our gross margins on products we sell and therefore the income we realize on such sales in future periods.

 

Cyclicality in our business and general economic conditions could result in lower revenues and reduced profitability.

 

A portion of the products we sell are for residential and non-residential construction. The strength of these markets depends on new housing starts and business investment, which are a function of many factors beyond our control, including credit and capital availability, interest rates, foreclosure rates, housing inventory levels and occupancy, employment levels, consumer confidence and the health of the United States economy and mortgage markets. Economic downturns in the regions and markets we serve could result in lower revenues and, since many of our expenses are fixed, lower profitability. The challenging economic conditions in recent years, including tighter credit markets, have adversely affected demand for new residential and non-residential projects and, to a lesser extent, re-roofing projects, and may continue to negatively affect expenditures for roofing in the near term. Unfavorable changes in demographics, credit markets, consumer confidence, housing affordability, or housing inventory levels and occupancy, or a weakening of the United States economy or of any regional or local economy in which we operate could adversely affect consumer spending, result in decreased demand for our products, and adversely affect our business. In addition, instability in the economy and financial markets, including as a result of terrorism or civil or political unrest, may result in a decrease in housing starts, which would adversely affect our business.

 

Seasonality in the construction and re-roofing industry generally results in second quarter losses.

 

Our second quarter is typically affected adversely by winter construction cycles and cold weather patterns as the levels of activity in the new construction and re-roofing markets decrease. Because many of our expenses remain relatively fixed throughout the year, we generally record a loss during our second quarter. We expect that these seasonal variations will continue in the near future.

 

If we encounter difficulties with our management information systems, we could experience problems with inventory, collections, customer service, cost control and business plan execution.

 

We believe our management information systems are a competitive advantage in maintaining our

leadership position in the roofing distribution industry. However, if we experience problems with our management information systems, we could experience, among other things, product shortages and/or an increase in accounts receivable aging. Any failure by us to properly maintain and protect our management information systems could adversely impact our ability to attract and serve customers and could cause us to incur higher operating costs and experience delays in the execution of our business plan.

 

Since we rely heavily on information technology both in serving our customers and in our enterprise infrastructure in order to achieve our objectives, we may be vulnerable to damage or intrusion from a variety of cyber-attacks including computer viruses, worms or other malicious software programs that may access our systems. Despite the precautions we take to mitigate the risks of such events, an attack on our enterprise information technology system could result in theft or disclosure of our proprietary or confidential information or a breach of confidential customer or employee information. Such events could have an adverse impact on revenue, harm our reputation, and cause us to incur significant legal liability and costs to address and remediate such events and related security concerns.

 

An impairment of goodwill and/or other intangible assets could reduce net income.

 

Acquisitions frequently result in the recording of goodwill and other intangible assets. At September 30, 2015, goodwill represented approximately 32% of our total assets. Goodwill is not amortized for financial reporting purposes and is subject to impairment testing at least annually using a qualitative approach. 

 

We evaluate the recoverability of goodwill for impairment in between our annual tests when events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. Any impairment of goodwill will reduce net income in the period in which the impairment is recognized.

 

We might need to raise additional capital, which may not be available, thus limiting our growth prospects.

 

In the future we may require equity or additional debt financing in order to consummate an acquisition, for additional working capital for expansion, or if we suffer more than seasonally expected losses. In the event such additional financing is unavailable to us on commercially attractive terms or at all, we may be unable to expand or make acquisitions or pursue other growth opportunities.

 

 12 

 

  

Major disruptions in the capital and credit markets may impact both the availability of credit and business conditions.

 

If the financial institutions that have extended credit commitments to us are adversely affected by major disruptions in the capital and credit markets, they may become unable to fund borrowings under those credit commitments. This could have an adverse impact on our financial condition since we need to borrow funds at times for working capital, acquisitions, capital expenditures and other corporate purposes.

 

Major disruptions in the capital and credit markets could also lead to broader economic downturns, which could result in lower demand for our products and increased incidence of customers’ inability to pay their accounts. The majority of our net sales volume in fiscal year 2015 was facilitated through the extension of trade credit to our customers. Additional customer bankruptcies or similar events caused by such broader downturns may result in a higher level of bad debt expense than we have historically experienced. Also, our suppliers may be impacted, causing potential disruptions or delays of product availability. These events would adversely impact our results of operations, cash flows and financial position.

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.    PROPERTIES

 

As of November 1, 2015, we lease 352 facilities including our headquarters and other support facilities, throughout the United States and Canada, including 85 branches acquired in the acquisition of Roofing Supply Group (“RSG”) on October 1, 2015 (See Note 17 to the Consolidated Financial Statements). These leased facilities range in size from approximately 2,000 square feet to 137,000 square feet. In addition, we own 14 sales/warehouse facilities located in Manchester, New Hampshire; Reading, Pennsylvania; Montreal, Quebec (2); Sainte-Foy, Quebec; Delson, Quebec; Trois Rivieres, Quebec; Salisbury, Maryland; Hartford, Connecticut; Cranston, Rhode Island; Lancaster, Pennsylvania; Jacksonville, Florida; Easton, Maryland; and Manassas, Virginia. These owned facilities range in size from 11,500 square feet to 68,000 square feet. All of the owned properties are mortgaged to our senior lenders. We believe that our properties are in good operating condition and adequately serve our current business operations.

 

As of November 1, 2015, we operated 357 branches (including 85 RSG branches), a few with multiple leased facilities or combined facilities, and eight other facilities were located in the following states and provinces:

 

 13 

 

 

State  Number of
Beacon
 Branches
   Number of
RSG Acquired
Branches
   Non-Branch
 Facilities
 
Alabama   5    3      
Arizona   2    3      
Arkansas   4    1      
California   16    12      
Colorado   10    2      
Connecticut   2         1 
Delaware   3           
Florida   12    8      
Georgia   8    3    1 
Idaho        1      
Illinois   7           
Indiana   6           
Iowa   2           
Kansas   4    1      
Kentucky   4    2      
Louisiana   6    4      
Maine   4           
Maryland   14         1 
Massachusetts   11           
Michigan   2           
Minnesota   3           
Mississippi   2           
Missouri   8    2      
Montana   1           
Nebraska   5    2      
Nevada        1      
New Hampshire   2           
New Jersey   1           
New Mexico   1    1      
New York   2           
North Carolina   13    3    2 
Ohio   6    4      
Oklahoma   3    1      
Pennsylvania   26    2      
Rhode Island   1           
South Carolina   5    3      
South Dakota   2           
Tennessee   7    3      
Texas   24    14      
Utah   1    3      
Vermont   1           
Virginia   9    3    2 
Washington        3      
West Virginia   4           
Wyoming   2           
                
Subtotal— United States   251    85    7 
                
Canadian Provinces               
Alberta   3           
British Columbia   4           
Nova Scotia   1           
Ontario   6         1 
Quebec   5           
Saskatchewan   2           
                
Subtotal—Canada   21         1 

 

 14 

 

 

ITEM 3.    LEGAL PROCEEDINGS

 

From time to time, we are involved in lawsuits that are brought against us in the normal course of business. We are not currently a party to any legal proceedings that would be expected, either individually or in the aggregate, to have a material adverse effect on our business or financial condition.

 

ITEM 4.    MINE SAFETY DISCLOSURES

 

Not applicable.

 

 15 

 

 

PART II

 

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock trades on the NASDAQ Global Select Market (the “NASDAQ”) under the symbol “BECN”. The following table lists quarterly information on the price range of our common stock based on the high and low reported sale prices for our common stock as reported by NASDAQ for the periods indicated below:

 

   High   Low 
         
Year ended September 30, 2014:          
           
First quarter  $40.70   $34.09 
Second quarter  $40.91   $35.50 
Third quarter  $38.99   $33.00 
Fourth quarter  $33.70   $24.96 
           
Year ended September 30, 2015:          
           
First quarter  $29.10   $24.17 
Second quarter  $31.30   $23.21 
Third quarter  $34.01   $29.72 
Fourth quarter  $36.61   $30.08 

 

There were 186 registered holders of record of our common stock as of November 1, 2015.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

No purchases of our equity securities were made by us or any affiliated entity during the fourth quarter of the fiscal year ended September 30, 2015.

 

Recent Sales of Unregistered Securities

 

None.

 

Dividends

 

We have not paid cash dividends on our common stock and do not anticipate paying dividends in the foreseeable future. Our board of directors currently intends to retain any future earnings for reinvestment in our growing business. Our revolving credit facilities currently prohibit the payment of dividends without the prior written consent of our lenders. Any future determination to pay dividends will also be at the discretion of our board of directors and will be dependent upon our results of operations and cash flows, our financial position and capital requirements, general business conditions, legal, tax, regulatory and any contractual restrictions on the payment of dividends, and any other factors our board of directors deems relevant.

 

 16 

 

 

Performance Graph

 

The following graph compares the cumulative total shareholder return (including reinvestment of dividends) of Beacon Roofing Supply, Inc.’s common stock based on its market prices, beginning with the start of fiscal year 2010 and each fiscal year thereafter, with (i) the Nasdaq Index and (ii) the S&P 1500 Building Products Index.

 

 

The line graph assumes that $100 was invested in our common stock, the Nasdaq Index and the S&P 1500 Building Products Index on September 30, 2009. The closing price of our common stock on September 30, 2015 was $32.49. The stock price performance of Beacon Roofing Supply, Inc.’s common stock depicted in the graph above represents past performance only and is not necessarily indicative of future performance.

 

 17 

 

  

ITEM 6.    SELECTED FINANCIAL DATA

 

You should read the following selected financial information together with our financial statements and related notes and “Management’s discussion and analysis of financial condition and results of operations” also included in this Form 10-K. We have derived the statement of operations data for the years ended September 30, 2015, September 30, 2014 and September 30, 2013, and the balance sheet information at September 30, 2015 and September 30, 2014, from our audited financial statements included in this Form 10-K. We have derived the statements of operations data for the years ended September 30, 2012 and September 30, 2011, and the balance sheet data at September 30, 2013, September 30, 2012 and September 30, 2011, from our audited financial statements not included in this Form 10-K.

 

Statement of operations data

 

   2015   2014   2013   2012   2011 
   (dollars in thousands, except per share amounts) 
Net sales  $2,515,169   $2,326,905   $2,240,723   $2,043,658   $1,817,423 
Cost of products sold   1,919,804    1,799,065    1,709,326    1,542,254    1,397,798 
Gross profit   595,365    527,840    531,397    501,404    419,625 
Operating expenses   478,284    428,977    401,676    357,732    315,883 
Income from operations   117,081    98,863    129,721    143,672    103,742 
Interest expense, financing costs and other   (11,037)   (10,095)   (8,247)   (17,173)   (13,364)
Income taxes   (43,767)   (34,922)   (48,867)   (50,934)   (31,158)
Net income  $62,277   $53,846   $72,607   $75,565   $59,220 
Adjusted Net income*  $69,255   $53,846   $72,607   $75,565   $59,220 
                          
Net income per share:                         
Basic  $1.26   $1.09   $1.50   $1.62   $1.29 
Diluted  $1.24   $1.08   $1.47   $1.58   $1.27 
                          
Adjusted Net income per share*:                         
Basic  $1.40   $1.09   $1.50   $1.62   $1.29 
Diluted  $1.38   $1.08   $1.47   $1.58   $1.27 
                          
Weighted average shares outstanding:                         
Basic   49,578,130    49,227,466    48,472,240    46,718,948    45,919,198 
Diluted   50,173,478    49,947,699    49,385,335    47,840,967    46,753,152 
                          
Other financial and operating data:                         
Depreciation and amortization  $34,842   $30,294   $30,415   $24,353   $25,060 
Capital expenditures (excluding acquisitions)  $20,802   $37,239   $26,120   $17,404   $14,433 
Number of branches at end of period   274    264    236    209    185 

 

*Operating expenses for 2015 includes a non-recurring charge of $7.3 million ($7.0 million, net of taxes) for the recognition of certain transactional costs related to the RSG acquisition. Note: The Company’s management believes that “Adjusted net income” and “Adjusted net income per share”, which excludes non-recurring transaction costs related to the RSG acquisition, are useful to investors because it permits investors to better understand year-over-year changes in underlying operating performance. While management believes Adjusted Net Income and Adjusted Earnings per Share (EPS) are useful measures for investors, these are not measurements presented in accordance with United States generally accepted accounting principles (GAAP). You should not consider Adjusted Net Income and Adjusted Earnings per Share in isolation or as a substitute for net income and net loss per share or diluted earnings per share calculated in accordance with GAAP. See reconciliation of Non-GAAP Measure in Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Balance sheet data

 

   September 30, 
   2015   2014   2013   2012   2011 
   (dollars in thousands) 
Cash and cash equivalents  $45,661   $54,472   $47,027   $40,205   $143,027 
Total assets  $1,545,912   $1,433,896   $1,338,696   $1,216,982   $1,156,964 
Borrowings under revolving lines of credit, current portions of long-term debt and other obligations  $27,560   $35,116   $62,524   $56,932   $15,605 
                          
Long-term debt, net of current portions:                         
Senior notes payable and other obligations  $174,375   $185,625   $196,875   $208,125   $301,544 
Other long-term obligations   22,367    30,835    12,726    12,750    9,967 
   $196,742   $216,460   $209,601   $220,875   $311,511 
                          
Stockholders’ equity  $883,116   $817,101   $754,356   $651,962   $538,427 

 

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Form 10-K. In addition to historical information, the following discussion and other parts of this Form 10-K contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by this forward-looking information due to the factors discussed under “Risk factors,” “Forward-looking statements” and elsewhere in this Form 10-K. Certain tabular information will not foot due to rounding.

 

Overview

 

We are the largest publicly traded distributor of residential and non-residential roofing materials in the United States, with leading positions in key metropolitan markets in both the United States and Canada. We are also a leading distributor of complementary building products, including siding, windows, and waterproofing systems for residential and non-residential building exteriors. We purchase products from a large number of manufacturers and then distribute these goods to a customer base consisting of contractors and, to a lesser extent, general contractors, homebuilders, retailers and building material suppliers. As of September 30, 2015, we operated 274 branches in 42 states throughout the United States and six provinces in Canada. On October 1, 2015, we acquired Roofing Supply Group, LLC (“RSG”), a leading roofing products distributor in a cash and stock transaction valued at approximately $1.1 billion. Headquartered in Dallas, Texas, RSG distributes roofing supplies and related materials from 83 locations across 24 states, including the key Western and Southern markets of California, Florida, Texas, and the Pacific Northwest with branches in Seattle and Spokane

 

We stock one of the most extensive assortments of high quality branded products in the industry with approximately 2,000 to 11,000 SKUs per branch available in inventory, enabling us to deliver products to serve nearly 53,000 customers on a timely basis. In fiscal year 2015, approximately 84% of our revenue was derived from roofing products and services. For the year ended September 30, 2015, we generated net sales of $2.5 billion.

 

Execution of the operating plan at each of our branches drives our financial results. Revenues are impacted by the relative strength of the residential and non-residential roofing markets we serve. We allow each of our branches to develop its own marketing plan and mix of products based upon its local market. We differentiate ourselves from the competition by providing customer services, including job site delivery, tapered insulation layouts and design and metal fabrication, and by providing credit. We consider customer relations and our employees’ knowledge of roofing and exterior building materials to be very important to our ability to increase customer loyalty and maintain customer satisfaction. We invest significant resources in training our employees in sales techniques, management skills and product knowledge. Although we consider these attributes important drivers of our business, we continually pay close attention to controlling operating costs.

 

Earnings in the fourth quarter of fiscal 2015 included a non-recurring charge of $7.3 million ($7.0 million net of taxes), or $0.14 diluted earnings per share, for the recognition of certain transactional costs related to the RSG acquisition. Earnings in the four quarters of fiscal 2014 included no one-time or non-recurring activities.

 

Our growth strategy includes both internal growth (opening branches, growing sales with existing customers, adding new customers and introducing new products) and acquisition growth. Our main acquisition strategy is to target market leaders in geographic areas that we do not service or that complement our existing operations in an area. The following transactions highlight our recent success delivering on our growth strategy:

 

·We have continued to focus on organic greenfield growth with the opening of six new branches in 2015, 26 new branches in fiscal year 2014, 10 new branches in fiscal year 2013 and four new branches in fiscal year 2012. These 46 new branch locations in the past four years have allowed us to strategically penetrate deeper into many of our existing markets and enter into new markets. Although these new greenfield locations impact our operating cost structure in the near-term, we believe that our greenfields are strategically located within markets with strong dynamics and provide the opportunity to quickly establish our presence and gain local market share.

 

·We have also continued to focus on growth through strategic acquisitions:

 

oIn June 2015, we acquired ProCoat Systems, Inc. (‘‘ProCoat’’), a distributor of residential and non-residential exterior building materials, including stucco, stone, waterproofing and concrete restoration. This acquisition strengthens our complementary product offerings both to our customers in the Denver and the surrounding markets. This acquisition also will allow Beacon to introduce ProCoat’s products to other Beacon locations across the country.
oIn October 2014, we acquired Applicators Sales & Service, a distributor of residential roofing, siding and windows products and related accessories, with four locations in Maine and one location in New Hampshire. This acquisition complemented an existing market in which we previously had operations, allowing us to capture more of the localized market share and, in addition, provides us with a high mix of complementary products.

 

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oIn October 2014, we acquired Wholesale Roofing Supply, a distributor of residential roofing products and related accessories with a nine-acre facility located in Grand Prairie, Texas. This acquisition complemented an existing market in which we previously had operations, allowing us to capture more of the localized market share.
oIn August 2014, we acquired All Weather Products, a distributor of residential and non-residential roofing products and related accessories, with three locations in the western province of British Columbia, Canada. This acquisition complemented an existing market in which we previously had operations, allowing us to capture more of the localized market share.
oIn December 2012, we acquired Ford Wholesale Co. (‘‘Ford Wholesale’’) and Construction Materials Supply; both are distributors of residential and non-residential roofing and related accessories with a combined five locations in Northern California. These acquisitions provided entry into a new geographic market with no branch overlap with our existing operations.
oIn November 2012, we acquired McClure-Johnston, a distributor of residential and non-residential roofing products and related accessories, which was headquartered in the Pittsburgh area and had 14 branches at the time of acquisition, including eight in Pennsylvania, three in West Virginia, one in Western Maryland and two in Georgia. This acquisition complemented an existing market in which we previously had operations, allowing us to capture more of the localized market share.

 

General

 

We sell all materials necessary to install, replace and repair residential and non-residential roofs, including:

 

·Shingles;

 

·Single-ply roofing;

 

·Metal roofing and accessories;

 

·Modified bitumen;

 

·Built up roofing;

 

·Insulation;

 

·Slate and tile;

 

·Fasteners, coatings and cements; and

 

·Other roofing accessories.

 

We also sell complementary building products such as:

 

·Vinyl and fiber cement siding;

 

·Doors, windows and millwork;

 

·Wood and fiber cement siding;

 

·Residential insulation; and

 

·Waterproofing systems.

 

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The following is a summary of our net sales by product group for the last three full fiscal years (“2015”, “2014” and “2013”). Percentages may not total due to rounding.

 

   Year Ended September 30, 
   2015   2014   2013 
   Net Sales   Mix   Net Sales   Mix   Net Sales   Mix 
(dollars in thousands)                              
Residential roofing products  $1,236,397    49.2%  $1,108,516    47.7%  $1,100,508    49.1%
Non-residential roofing products   882,970    35.1%   876,032    37.6%   822,726    36.7%
Complementary building products   395,802    15.7%   342,357    14.7%   317,489    14.2%
   $2,515,169    100.0%  $2,326,905    100%  $2,240,723    100%

 

We have nearly 53,000 customers, none of which individually represent more than 2% of our total net sales. Many of our customers are small to mid-size contractors with relatively limited capital resources. We maintain strict credit review and approval policies, which has helped to keep losses from uncollectible customer receivables within our expectations. Bad debt expense in 2015, 2014, and 2013 was less than 0.1% of net sales.

 

Our expenses consist primarily of the cost of products purchased for resale, labor, fleet, occupancy, and selling and administrative expenses. We compete for business and may respond to competitive pressures at times by lowering prices in order to maintain our market share.

 

We opened six new branches in 2015, 26 new branches in 2014, and 10 new branches in 2013. While we slowed the pace of new branch openings following the economic downturn that began in 2007, we began increasing our greenfield activity in 2014 which we expect to continue through 2016 as part of our continued growth strategy. Typically, when we open a new branch, we transfer a certain level of existing business from an existing branch to the new branch. This allows the new branch to commence with a base business and also allows the existing branch to target other growth opportunities.

 

In managing our business, we consider all growth, including the opening of new greenfield branches, to be internal (organic) growth unless it results from an acquisition. When we refer to growth in existing markets or internal growth, we include growth from existing and newly opened greenfield branches but exclude growth from acquired branches until they have been under our ownership for at least four full fiscal quarters at the start of the fiscal reporting period. When we refer to regions, we are referring to our geographic regions. At September 30, 2015, we had a total of 274 branches in operation. Our existing market calculations for 2015 include 264 branches and exclude acquired branches until they have been under our ownership for at least four full fiscal quarters at the start of the fiscal reporting period. Acquired markets for 2015 include All Weather Products, Applicator Sales & Service, Wholesale Roofing Supply, and Procoat (See Note 4 to the Consolidated Financial Statements).

 

When we refer to our net product costs, we are referring to our invoice cost less the impact of short-term buying programs (also referred to as “special buys” given the manner in which they are offered).

 

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Results of operations

 

The following discussion compares our results of operations for 2015, 2014 and 2013.

 

The following table presents information derived from our consolidated statements of operations expressed as a percentage of net sales for each of the respective the periods indicated. Percentages may not total due to rounding.

 

   Year ended September 30, 
   2015   2014   2013 
             
Net sales   100%   100%   100%
Cost of products sold   76.3    77.3    76.3 
Gross profit   23.7    22.7    23.7 
Operating expenses   19.0    18.4    17.9 
Income from operations   4.7    4.2    5.8 
Interest expense, financing costs and other   (0.4)   (0.4)   (0.4)
Income before provision for income taxes   4.2    3.8    5.4 
Provision for income taxes   (1.7)   (1.5)   (2.2)
Net income   2.5%   2.3%   3.2%
Adjusted Net income*   2.8%   2.3%   3.2%

 

 

*Operating expenses for 2015 includes a non-recurring charge of $7.3 million ($7.0 million, net of taxes) for the recognition of certain transactional costs related to the RSG acquisition, which is 0.29% of sales. Management believes the Adjusted Net Income for 2015 provides a meaningful comparison to prior periods of operating results to adjust for the impact of the RSG Acquisition.

 

Adjusted Basic and Diluted Net Income Per Share
("Adjusted Net Income per Share")
  Year Ended
September 30, 2015
 
   (dollars in thousands)   EPS - Basic   EPS - Diluted   % of Sales 
Net income  $62,277   $1.26   $1.24    2.5%
Company adjustments, net of income taxes:                    
RSG Acquisition non-recurring transaction costs   6,978    0.14    0.14    0.3%
Adjusted net income per share  $69,255   $1.40   $1.38    2.8%

 

Note: The Company’s management believes that “Adjusted net income” and “Adjusted net income per share”, which excludes non-recurring transaction costs related to the RSG acquisition, are useful to investors because it permits investors to better understand year-over-year changes in underlying operating performance. While management believes Adjusted Net Income and Adjusted Earnings per Share (EPS) are useful measures for investors, these are not measurements presented in accordance with United States generally accepted accounting principles (GAAP). You should not consider Adjusted Net Income and Adjusted Earnings per Share in isolation or as a substitute for net income and net loss per share or diluted earnings per share calculated in accordance with GAAP.

 

2015 compared to 2014

 

The following table presents a summary of our results of operations for 2015 and 2014, broken down by existing markets and acquired markets.

 

   Existing Markets   Acquired Markets   Consolidated 
(dollars in thousands)  2015   2014   2015   2014   2015   2014 
Net sales  $2,429,511   $2,326,313   $85,658   $592   $2,515,169   $2,326,905 
Gross profit   570,439    527,662    24,926    178    595,365    527,840 
Gross margin   23.5%   22.7%   29.1%   30.0%   23.7%   22.7%
Operating expenses (1)   446,989    428,747    31,295    229    478,284    428,977 
Operating expenses as a % of net sales   18.4%   18.4%   36.5%   38.7%   19.0%   18.4%
Operating income (loss)  $123,450   $98,914   $(6,370)  $(52)  $117,080   $98,863 
Operating margin   5.1%   4.3%   (7.4)%   (8.7)%   4.7%   4.2%

 

 

(1)In 2015, we recorded amortization expense for our acquired markets related to intangible assets recorded under purchase accounting of $4.5 million; there was none in 2014. In addition, operating expenses for acquired markets in 2015 included a non-recurring charge of $7.3 million ($7.0 million, net of taxes) for the recognition of certain transactional costs related to the RSG acquisition.

 

Net Sales

 

Consolidated net sales increased $188.3 million, or 8.1%, to $2.52 billion in 2015, from $2.33 billion in 2014. Existing market sales increased $103.2 million or 4.4%. Acquired market sales increased $85.1 million due primarily to the full year’s sales impact from the 2014 acquisitions, as well as the partial year impact from our 2015 acquisitions. There were 253 business days in both 2015 and 2014. We attribute the existing market sales increase primarily to the following factors:

 

·increased demand in our residential and complementary products groups;
·increased selling prices in our complementary products group;

 

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·six new greenfield branches opened in 2015, combined with 26 additional greenfield branches opened in fiscal 2014;

 

partially offset by:

 

·lower direct sales activity; and
·lower residential roofing average selling prices.

 

In 2015, we acquired eight branches, opened six new branches, and closed four branches. We estimate the impact of inflation or deflation on our sales and gross profit by looking at changes in our average selling prices and gross margins (discussed below). Average overall selling prices declined 1% in 2015, compared to 2014, driven primarily by declines in residential selling prices which were down by approximately 2-3%, year over year. These declines were partially offset by continued increases in the average selling prices of complementary products which increased approximately 2% to 3%, year over year. Non-residential selling prices remained relatively flat (less than 1% movement). During the same period, net product costs of our residential roofing products decreased approximately 2% to 3%, non-residential product costs remained relatively flat (less than 1% movement), and complementary net product costs increased approximately 2%. Overall gross margins increased in YTD 2015 due to an improvement in gross margin in a complementary products group combined with favorable shift in sales mix to higher-margin residential and complementary products.

 

Existing market net sales by geographical region increased (decreased) as follows: Northeast 7.2%; Mid-Atlantic 3.7%; Southeast 5.1%; Southwest (3.3%); Midwest 7.1%; West 14.1%; and Canada (.2%). These variations were primarily caused by short-term factors such as local market conditions, weather conditions and storm activity.

 

Product group sales for our existing markets were as follows:

 

   2015   2014   Change   % Change Based
On Average Sales
Per Business Day
 
   Net Sales   Mix   Net Sales   Mix             
(dollars in thousands)                                   
Residential roofing products  $1,191,927    49.1%  $1,108,032    47.6%  $83,895    7.6%   7.6%
Non-residential roofing products   879,785    36.2%   875,996    37.7%   3,789    0.4%   0.4%
Complementary building products   357,799    14.7%   342,284    14.7%   15,515    4.6%   4.6%
   $2,429,511    100%  $2,326,312    100%  $103,199    4.4%   4.4%

 

For 2015, our acquired markets recognized sales of $44.5, $3.2 and $38.0 million in residential roofing products, non-residential roofing products and complementary building products, respectively. The 2015 existing market sales of $2,429.5 million plus the total sales from acquired markets of $85.7 million agrees (rounded) to our reported total 2015 sales of $2,515.2 million.  For 2014, our acquired markets recognized sales of $0.5 million in residential roofing products, and less than $0.1 million for both non-residential roofing products and complementary building products. The 2014 existing market sales of $2,326.3 million plus the total sales from acquired markets of $0.6 million agrees (rounded) to our reported total 2014 sales of $2,326.9 million. Prior year sales by product group are presented in a manner consistent with the current year’s product classifications. We believe the existing market information is useful to investors because it helps explain organic growth or decline.

  

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Gross Profit

 

Gross profit for consolidated and existing markets were as follows:

 

   2015   2014   Change 
(dollars in thousands)                    
Gross profit  $595,365   $527,840   $67,525         12.8%
Existing markets   570,439    527,662    42,777         8.1%
                          
Gross margin   23.7%   22.7%        1.0%     
Existing markets   23.5%   22.7%        0.8%     

 

Our existing market gross profit increased $42.8 million, or 8.1%, in 2015, while our acquired market gross profit increased by $24.7 million, to $24.9 million. In 2015, our overall and existing market gross margins increased to 23.7%, from 22.7%, respectively, in 2014. The increased overall gross margins in YTD 2015 were due primarily to pricing increases across our complementary products as a result of increased demand and the impact of our acquisitions in fiscal 2015, combined with a favorable shift in our sales mix during YTD 2015 towards residential and complementary products, which generally have higher gross margins than our non-residential products.

 

Direct sales (products shipped by our vendors directly to our customers), which typically have substantially lower gross margins (and operating expenses) compared to our warehouse sales, represented 16.4% and 18.2% of our net sales in 2015 and 2014, respectively. This decrease in the percentage of direct sales was primarily attributable to the lower mix of non-residential roofing product sales, as well as lower roofing sales to lumber yards and other building material suppliers which are more commonly facilitated by direct shipment. There were no material regional impacts from changes in the direct sales mix of our geographical regions.

 

Operating Expenses

 

Operating expenses for consolidated and existing markets were as follows:

 

   2015   2014   Change 
(dollars in thousands)                    
Operating expenses  $478,284   $428,977   $49,307         11.5%
Existing markets   446,989    428,747    18,242         4.3%
                          
Operating expenses as a % of sales   19.0%   18.4%        0.6%     
Existing markets   18.4%   18.4%        0.2%     

 

Operating expenses in our existing markets increased $18.2 million, or 4.3% in 2015, to $447.0 million, compared to $428.7 million in 2014, while our acquired markets expenses increased by $31.1 million to $31.3 million, which includes a non-recurring charge of $7.3 million ($7.0 million, net of taxes) in 2015 for the recognition of certain transactional costs related to the RSG acquisition. The following factors were the leading causes of the higher operating expenses in our existing markets:

 

·as part of our strategic growth strategy, we opened 26 greenfield locations during fiscal 2014 and have added an additional six greenfield branches in 2015, which has driven incremental operating expense of $19.3 million over the prior year;

 

partially offset by:

 

·a decrease in bad debt expense of $1.5 million.

 

In 2015, we expensed a total of $16.2 million for the amortization of intangible assets previously recorded under purchase accounting, compared to $14.1 million in 2014. Our existing market operating expenses as a percentage of the related net sales for both 2015 and 2014 was 18.4%.

 

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Interest Expense, Financing Costs and Other

 

Interest expense, financing costs and other was $11.0 million in 2015, compared to $10.1 million in 2014. The Company uses derivative financial instruments to manage its exposure related to fluctuating cash flows from changes in interest rates. The impact of our interest rate derivative was to increase our interest expense, financing costs and other by $2.4 million and $2.3 million in 2015 and 2014, respectively.

 

Income Taxes

 

Income tax expense was $43.8 million in 2015, compared to $34.9 million in 2014. The increase was primarily due to an increase in pre-tax income as well as an increase in our effective rate to 41.27% in 2015, compared to 39.3% in YTD 2014, which was primarily driven by expense from non-deductible professional fees related to the RSG acquisition that closed on October 1, 2015. We expect our future effective annual income tax rate to average approximately 39.0% to 40.0%, excluding any discrete items. 

 

2014 compared to 2013

 

The following table presents a summary of our results of operations for 2014 and 2013, broken down by existing markets and acquired markets.

 

   Existing Markets   Acquired Markets   Consolidated 
(dollars in thousands)  2014   2013   2014   2013   2014   2013 
Net sales  $2,194,936   $2,132,698   $131,969   $108,025   $2,326,905   $2,240,723 
                               
Gross profit   498,897    506,211    28,943    25,186    527,840    531,397 
Gross margin   22.7%   23.7%   21.9%   23.3%   22.7%   23.7%
                               
Operating expenses (1)   398,533    375,768    30,444    25,908    428,977    401,676 
Operating expenses as a % of net sales   18.2%   17.6%   23.1%   24.0%   18.4%   17.9%
                               
Operating income (loss)  $100,364   $130,443   $(1,501)  $(722)  $98,863   $129,721 
Operating margin   4.6%   6.1%   (1.1)%   -0.7%   4.2%   5.8%

  

 

(1)In 2014 and 2013, we recorded amortization expense for our acquired markets related to intangible assets recorded under purchase accounting of $3.2 million and $2.9 million, respectively.

 

Net Sales

 

Consolidated net sales increased $86.2 million, or 3.8%, to $2.33 billion in 2014 from $2.24 billion in 2013. Existing market sales increased $62.2 million or 2.9%. Acquired market sales increased $23.9 million due primarily to the full year’s sales impact from the 2013 acquisitions, as well as the partial year impact from our 2014 acquisitions. There were 253 business days in both 2014 and 2013. We attribute the existing market sales increase primarily to the following factors:

 

·increased demand in our non-residential and complementary products groups; and

 

·26 new greenfield branches opened in 2014 and 10 in 2013;

 

partially offset by:

 

·softer demand in our residential products group during the first half of 2014 due to the extended wetter weather, increased winter storm activity and colder temperatures that most of our markets experienced; and

 

·lower residential and non-residential roofing average selling prices during 2014, compared to 2013.

 

In 2014, we acquired three branches, opened 26 new branches, and closed two branches. We estimate the impact of inflation or deflation on our sales and gross profit by looking at changes in our average selling prices and gross margins (discussed below). Average overall selling prices declined across our residential and non-residential roofing products lines during 2014, compared to 2013, with residential roofing products down approximately 2.7% and non-residential roofing products down approximately 1.1%. Selling prices for our complementary building products were relatively flat year over year. During the same period, net product costs of residential roofing products declined approximately 2.6%, non-residential roofing products declined approximately 0.4%, and complementary building product prices declined approximately 0.5%. The lower gross margins in 2014 (below) are an indicator that the deflation in our net product costs was less than the impact from the decrease in our average selling prices. Overall, year over year declines in selling prices are estimated to have adversely impacted existing net sales by approximately $38 million in 2014, compared to 2013.  We were able to fully offset the overall pricing impact with year over year increases in unit volume which we estimate contributed to an increase in net sales of approximately $100 million.

 

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Existing market net sales by geographical region increased (decreased) as follows: Northeast 2.4%; Mid-Atlantic 0.2%; Southeast (1.6%); Southwest (3.5%); Midwest 10.8%; West 17.5%; and Canada 1.7%. These variations were primarily caused by short-term factors such as local market conditions, weather conditions and storm activity.

 

Product group sales for our existing markets were as follows:

 

   2014   2013   Change   % Change
Based On
Average
Sales Per
Business
Day
 
   Net Sales   Mix   Net Sales   Mix             
(dollars in thousands)                            
Residential roofing products  $1,063,116    48.4%  $1,061,412    49.8%  $1,704    0.2%   0.2%
Non-residential roofing products   828,499    37.8%   781,484    36.6%   47,015    6.0%   6.0%
Complementary building products   303,321    13.8%   289,802    13.6%   13,519    4.7%   4.7%
   $2,194,936    100.0%  $2,132,698    100.0%  $62,238    2.9%   2.9%

 

For 2014, our acquired markets recognized sales of $45.5, $47.5 and $39.0 million in residential roofing products, non-residential roofing products and complementary building products, respectively. The 2014 existing market sales of $2,194.9 million plus the total sales from acquired markets of $132.0 million agrees (rounded) to our reported total 2014 sales of $2,326.9 million.  For 2013, our acquired markets recognized sales of $39.1, $41.2 and $27.7 million in residential roofing products, non-residential roofing products and complementary building products, respectively. The 2013 existing market sales of $2,132.7 million plus the total sales from acquired markets of $108.0 million agrees (rounded) to our reported total 2013 sales of $2,240.7 million. Prior year sales by product group are presented in a manner consistent with the current year’s product classifications. We believe the existing market information is useful to investors because it helps explain organic growth or decline.

 

Gross Profit

 

Gross profit for consolidated and existing markets were as follows:

 

   2014   2013   Change 
(dollars in thousands)                    
Gross profit  $527,840   $531,397   $(3,557)        -0.7%
Existing markets   498,897    506,211    (7,314)        -1.4%
                          
Gross margin   22.7%   23.7%        -1.0%     
Existing markets   22.7%   23.7%        -1.0%     

 

Our existing market gross profit declined $7.3 million, or (1.4%), in 2014, while our acquired market gross profit increased by $3.8 million, to $28.9 million. In 2014, our overall and existing market gross margins declined in 2014 to 22.7%, from 23.7%, respectively, in 2013. The lower overall gross margins in 2014 were due primarily to pricing pressure across our residential and non-residential roofing products as a result of soft demand, combined with a shift in our sales mix during 2014 towards higher direct non-residential product sales, which generally have lower gross margins than our other products. Additionally, gross margins were adversely impacted by a decline in higher-margin residential roofing product sales in 2014 as a result of the earlier onset of winter weather, the extended wetter weather, increased winter storm activity and colder temperatures during the first half of 2014 in most of our markets compared to last year.

 

Direct sales (products shipped by our vendors directly to our customers), which typically have substantially lower gross margins (and operating expenses) compared to our warehouse sales, represented 18.2% and 17.5% of our net sales in 2014 and 2013, respectively. This increase in the percentage of direct sales was primarily attributable to the higher mix of non-residential roofing product sales, as well as roofing sales to lumber yards and other building material suppliers which are more commonly facilitated by direct shipment. There were no material regional impacts from changes in the direct sales mix of our geographical regions.

 

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Operating Expenses

 

Operating expenses for consolidated and existing markets were as follows:

 

   2014   2013   Change 
(dollars in thousands)                    
Operating expenses  $428,977   $401,676   $27,301         6.8%
Existing markets   398,533    375,768    22,765         6.1%
                          
Operating expenses as a % of sales   18.4%   17.9%        0.5%     
Existing markets   18.2%   17.6%        0.6%     

 

Operating expenses in our existing markets increased $22.8 million, or 6.1% in 2014, to $398.5 million, compared to $375.8 million in 2013, while our acquired markets expenses increased by $4.5 million to $30.4 million. The following factors were the leading causes of the higher operating expenses in our existing markets:

 

·26 new greenfield openings during the year accounted for increased payroll and employee benefit costs of $5.6 million, increased warehouse and other general and administrative expenses of $3.8 million, and increased selling expenses of $1.9 million in 2014;

 

·increased selling expenses of $1.3 million in 2014 due to additional sales volumes from our existing branches;

 

·increased warehouse and general and administrative expenses of $2.5 million from our existing branches; and

 

·increased bad debt expense of $2.9 million in 2014;

 

partially offset by:

 

·lower non-cash stock compensation expense of $2.9 million due to an adjustment to previously issued performance based equity awards for the projection of the number of restricted units that are expected to vest based on achievement of the underlying related performance measures.

 

In 2014, we expensed a total of $14.1 million for the amortization of intangible assets previously recorded under purchase accounting, compared to $14.0 million in 2013. Our existing market operating expenses as a percentage of the related net sales in 2014 was 18.2% compared to 17.6% in 2013.

 

Interest Expense, Financing Costs and Other

 

Interest expense, financing costs and other was $10.1 million in 2014, compared to $8.2 million in 2013 due primarily to higher average debt balances on our revolver as well as additional outstanding borrowings against our equipment financing facility in 2014. The Company uses derivative financial instruments to manage its exposure related to fluctuating cash flows from changes in interest rates. The impact of our interest rate derivative was to increase our interest expense, financing costs and other by $2.3 million and $1.3 million in 2014 and 2013, respectively.

 

Income Taxes

 

Income tax expense was $34.9 million in 2014, compared to $48.9 million in 2013. The decrease was primarily due to a decline in pre-tax income, as well as reduction in our effective tax rate to 39.3% in 2014, compared to 40.2% in YTD 2013, which was generally driven by benefits from state credits. We expect our future annual income tax rate to average approximately 39% to 40%, excluding any discrete items.

 

Seasonality and quarterly fluctuations

 

In general, sales and net income are highest during our first, third and fourth fiscal quarters, which represent the peak months of construction and re-roofing, especially in our branches in the northern and mid-western United States and in Canada. We have historically incurred low net income levels or net losses during the second quarter when our sales are substantially lower.

 

We generally experience an increase in inventory, accounts receivable and accounts payable during the third and fourth quarters of the year as a result of the seasonality of our business. Our peak cash usage generally occurs during the third quarter, primarily because accounts payable terms offered by our suppliers typically have due dates in April, May and June, while our peak accounts receivable collections typically occur from June through November.

 

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We generally experience a slowing of our accounts receivable collections during our second quarter, mainly due to the inability of some of our customers to conduct their businesses effectively in inclement weather in certain of our divisions. We continue to attempt to collect those receivables, which require payment under our standard terms. We do not provide material concessions to our customers during this quarter of the year.

 

Our vendors are also affected by the seasonality in the industry and are more likely to provide seasonal incentives in our second quarter as a result of the lower level of roofing activity. We generally experience our peak working capital needs during the third quarter after we build our inventories following the winter season but before we begin collecting on most of our spring receivables.

 

Certain quarterly financial data

 

The following table sets forth certain unaudited quarterly data for the fiscal years 2015 and 2014 which, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of this data. Results of any one or more quarters are not necessarily indicative of results for an entire fiscal year or of continuing trends. Totals may not total due to rounding.

 

   2015   2014 
   Qtr 1   Qtr 2   Qtr 3   Qtr 4   Qtr 1   Qtr 2   Qtr 3   Qtr 4 
   (unaudited; dollars in millions, except per share data) 
Net sales  $596.0   $413.2   $718.2   $787.7   $552.1   $384.9   $663.4   $726.5 
Gross profit   137.6    96.8    169.4    191.6    126.9    86.8    150.8    163.3 
Income (loss) from operations   23.8    (14.2)   47.7    58.6    27.1    (17.2)   45.8    43.2 
Net income (loss)  $12.9   $(9.8)  $28.3   $30.8   $15   $(12.1)  $26.8   $24.1 
                                         
Earnings (loss) per share - basic  $0.26   $(0.20)  $0.57   $0.62   $0.31   $(0.25)  $0.54   $0.49 
Earnings (loss) per share - fully diluted  $0.26   $(0.20)  $0.56   $0.61   $0.30   $(0.25)  $0.54   $0.48 
                                         
Quarterly sales as % of year’s sales   23.7%   16.4%   28.6%   31.3%   23.7%   16.6%   28.5%   31.2%
Quarterly gross profit as % of year’s gross profit   23.1%   16.3%   28.5%   32.2%   24.0%   16.5%   28.6%   30.9%
Quarterly income (loss) from operations as % of year’s income from operations   20.3%   (12.1)%   40.7%   50.1%   27.4%   (17.4)%   46.3%   43.7%

 

Earnings in the fourth quarter of fiscal 2015 included a non-recurring charge of $7.3 million ($7.0 million net of taxes), or $0.14 diluted earnings per share, for the recognition of certain transactional costs related to the RSG acquisition. Earnings in the four quarters of fiscal 2014 included no one-time or non-recurring activities.

 

Impact of inflation

 

We believe that our results of operations are not materially impacted by moderate changes in the economic inflation rate. In general, we have historically been successful in passing on price increases from our vendors to our customers in a timely manner. In 2014, continued soft demand in the market drove down pricing to end customers. We also experienced declines in costs from vendors, although not enough to offset customer pricing declines. In 2015 however, we were able to offset selling price declines with lower product costs and favorable product mix, largely from greenfields implemented since 2013 and acquisitions made during 2015. As result of the aforementioned items, we recognized an increase in margin from 2014 improving to 23.7% from 22.7%. 

 

Liquidity and capital resources

 

We had cash and cash equivalents of $45.7 million at September 30, 2015, compared to $54.5 million at September 30, 2014. Our net working capital was $469.4 million at September 30, 2015, compared to $462.1 million at September 30, 2014.

 

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2015 compared to 2014

 

Operating activities consist primarily of net income adjusted for non-cash items, including depreciation and amortization and the effect of working capital changes. Our net cash provided by operating activities was $109.3 million in 2015, compared to $55.5 million in 2014. Cash from operations increased $53.9 million due primarily to the increase in net income of $8.4 million and an increase of cash provided by working capital changes of $25.7 million, net of the impact of businesses acquired, and an increase in deferred taxes of $14.6 million.

 

Investing activities consisted primarily of strategic acquisitions, as well as capital expenditures for growth and maintenance. Net cash used in investing activities was $104.7 million in 2015 compared to $37.3 million used in 2014. Capital expenditures were $20.8 million in 2015 compared to $37.2 million in 2014. In addition, we spent $85.3 million on acquisitions in 2015, compared to $1.5 million in 2014. We currently expect fiscal year 2016 capital expenditures to total approximately1.0% of net sales, mostly dependent upon our sales volume and exclusive of the impact of new branch openings.

 

Financing activities consisted primarily of borrowings and repayments related to the Revolver, Term Loan and equipment financing facilities, as well as fees and expenses paid in connection with our Credit Facility. Net cash used in financing activities was $12.7 million in 2015 compared to net cash used of $9.8 million in 2014. In 2015, we had net repayments of $5.4 million under our revolving credit facilities and made scheduled repayments of $11.3 million under our term loan, compared to net repayments of $27.6 million under our revolving credit facilities and scheduled repayments of $11.3 million under our term loan in 2014. Additionally, in 2015 we made scheduled repayments of $5.6 million under our equipment financing facilities. This compares to borrowings of $25.4 million and repayments of $5.0 million in 2014. Stock option exercises provided for proceeds of $7.9 million in 2015 compared to $7.7 million in 2014.

 

2014 compared to 2013

 

Operating activities consist primarily of net income adjusted for non-cash items, including depreciation and amortization and the effect of working capital changes. Our net cash provided by operating activities was $55.5 million in 2014, compared to $78.5 million in 2013. Cash from operations decreased $23.0 million due primarily to the decline in net income of $18.8 million and an increase of cash used by working capital changes of $3.6 million, net of the impact of businesses acquired.

 

Investing activities consisted primarily of strategic acquisitions, as well as capital expenditures for growth and maintenance. Net cash used in investing activities was $37.3 million in 2014 compared to $89.5 million used in 2013. Capital expenditures were $37.2 million in 2014 compared to $26.1 million in 2013. In addition, we spent $1.5 million on acquisitions in 2014, compared to $64.6 million in 2013.

 

Financing activities consisted primarily of borrowings and repayments related to the Revolver, Term Loan and equipment financing facilities, as well as fees and expenses paid in connection with our Credit Facility. Net cash used in financing activities was $9.8 million in 2014 compared to net cash provided of $18.0 million in 2013. In 2014, we had net repayments of $27.6 million under our revolving credit facilities and made scheduled repayments of $11.3 million under our term loan, compared to net borrowings of $6.3 million under our revolving credit facilities and scheduled repayments of $11.3 million under our term loan in 2013. Additionally, in 2014 we borrowed $25.4 million under our equipment financing facility to continue to invest in our distribution fleet to support our greenfield activity and made scheduled repayments of $5.0 million; comparatively in 2013, we made net repayments under our equipment financing facilities of $0.6 million. Stock option exercises provided for proceeds of $7.7 million in 2014 compared to $18.6 million in 2013.

 

Capital Resources

 

Our principal source of liquidity at September 30, 2015 was our cash and cash equivalents of $45.7 million and our available borrowings of $320.1 million under revolving lines of credit, which takes into account all of the debt covenants under the Credit Facility (see below), including the maximum consolidated total leverage ratio and minimum consolidated interest coverage ratio. Borrowings outstanding under the revolving lines of credit in the accompanying balance sheet at September 30, 2015 and September 30, 2014 were classified as short-term debt as we had the intent at both dates to pay off such amounts within 12 months. This was because we paid off the September 30, 2014 borrowings in 2015, and the borrowings for 2015 were paid off on October 1, 2015.

 

Liquidity is defined as the current amount of readily available cash and the ability to generate adequate amounts of cash to meet the current needs for cash. We assess our liquidity in terms of our cash and cash equivalents on hand and the ability to generate cash to fund our operating activities, taking into consideration the seasonal nature of our business.  Our cash equivalents are comprised of highly liquid money market funds which invest primarily in commercial paper or bonds with a rating of A-1 or better, and bank certificates of deposit.

 

Significant factors which could affect future liquidity include the following:

 

·the adequacy of available bank lines of credit;

 

·the ability to attract long-term capital with satisfactory terms;

 

·cash flows generated from operating activities;

 

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·acquisitions; and

 

·capital expenditures.

 

Our primary capital needs are for working capital obligations and other general corporate purposes, including acquisitions and capital expenditures. Our primary sources of working capital are cash from operations and cash equivalents, supplemented by bank borrowings. In the past, we have paid for acquisitions from cash on hand or financed them initially through increased bank borrowings, the issuance of common stock and/or other borrowings. We then repay any such borrowings with cash flows from operations. We have funded our past capital expenditures through increased bank borrowings, including equipment financing, or through capital leases, and then have reduced these obligations with cash flows from operations. On October 1, 2015, we refinanced our current bank borrowings and issued new debt to finance the RSG acquisition. See Note 17 of the Consolidated Financial Statements.

 

We believe we have adequate current liquidity and availability of capital to fund our present operations, meet our commitments on our existing debt and fund anticipated growth, including expansion in existing and targeted market areas. We continually seek potential acquisitions and from time to time hold discussions with acquisition candidates. If suitable acquisition opportunities or working capital needs arise that would require additional financing, we believe that our financial position and earnings history provide a strong base for obtaining additional financing resources at competitive rates and terms, as we have in the past. We may also issue additional shares of common stock to raise funds, which we last did in December 2005, or we may issue preferred stock.

 

Monitoring and Assessing Collectability of Accounts Receivable

 

We perform periodic credit evaluations of our customers and typically do not require collateral, although we typically obtain payment and performance bonds for any type of public work and have the ability to lien projects under certain circumstances. Consistent with industry practices, we require payment from most customers within 30 days, except for sales to our non-residential roofing contractors, which we typically require to pay in 60 days.

 

As our business is seasonal in certain geographic regions, our customers’ businesses are also seasonal. Sales are lowest in the winter months and our past due accounts receivable balance as a percentage of total receivables generally increases during this time. Throughout the year, we closely monitor our receivables and record estimated reserves based upon our judgment of specific customer situations, aging of accounts and our historical write-offs of uncollectible accounts.

 

Our regional credit offices are staffed to manage and monitor our receivable aging balances and our systems allow us to enforce pre-determined credit approval levels and properly leverage new business. The credit pre-approval process denotes the maximum requested credit amount that each level of management can approve, with the highest credit amount requiring approval by our CEO and CFO. There are daily communications with branch and field staff. Our regional offices conduct periodic reviews with their branch managers, various regional management staff and the VP-Credit. Depending on the state of the respective region’s receivables, these reviews can be weekly, bi-weekly or monthly. Additionally, the regions are required to submit a monthly receivable forecast to the VP-Credit. On a monthly basis, the VP-Credit will review and discuss these forecasts, as well as a prior month recap, with the CEO and CFO.

 

Periodically, we perform a specific analysis of all accounts past due and write off account balances when we have exhausted reasonable collection efforts and determined that the likelihood of collection is remote based upon the following factors:

 

·aging statistics and trends;

 

·customer payment history;

 

·review of the customer’s financial statements when available;

 

·independent credit reports; and

 

·discussions with customers.

 

We still pursue collection of amounts written off in certain circumstances and credit the allowance for any subsequent recoveries. Over the past three years, annual bad debt expense has averaged between 0.03% and 0.07% of net sales. In 2015, bad debt expense was 0.03% of net sales. The continued reduction in bad debt expense year over year is primarily attributed to the continued strengthening of the economy and credit environment.

 

Indebtedness

 

We currently have the following credit facilities:

 

·A senior secured credit facility in the United States;

 

·A Canadian senior secured credit facility; and

 

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·An equipment financing facility.

 

Senior Secured Credit Facility

 

On April 5, 2012, we replaced our prior credit facility with a new five-year senior secured credit facility that includes a $550 million United States credit facility (individually, the “U.S. Credit Facility”) and a C$15 million ($11.2 million at September 30, 2015) Canadian credit facility (individually, the “Canadian Revolver”) with Wells Fargo Bank, National Association, and a syndicate of other lenders (combined, the “Credit Facility”). We paid off debt of $304.0 million that was outstanding under the prior credit facility with the proceeds from the Credit Facility and from approximately $79 million of cash on hand. The $550 million U.S Credit Facility consists of a revolving credit facility of $325 million (the “U.S. Revolver”), which includes a sub-facility of $20 million for letters of credit, and a $225 million term loan (the “Term Loan”). The Term Loan has required amortization of 5% per year that is payable in quarterly installments, with the balance due on March 31, 2017. We may increase the Credit Facility by up to $200 million under certain conditions. There were no outstanding borrowings under the U.S. Revolver at September 30, 2015; there was C$15.0 million ($11.2 million) and $185.6 million outstanding under the Canadian Revolver and Term Loan, respectively, at September 30, 2015. There were $4.9 million of outstanding standby letters of credit at September 30, 2015. As of October 1, 2015, we refinanced our existing debt into $300 million aggregate principal amount of 6.375% Senior Notes due 2023, borrowings under a $450 million Term Loan B LIBOR based facility due 2022, and a $700 million asset based lending revolving credit facility.

 

Interest

 

The Credit Facility provides for borrowings under our U.S. Revolver and Canadian Revolver at a Base Rate. The Base Rate for borrowings under the U.S. Revolver is defined as the higher of the Prime Rate, or the Federal Funds Rate plus 0.50%, plus a margin above that rate. For borrowings made under the Canadian Revolver, the Base Rate is defined as the higher of the Canadian Prime Rate, or the annual rate of interest equal to the sum of the CDOR rate plus 1.00%, plus a margin above that rate. The margin for both base rates is currently 1.00% per annum and can range from 0.50% to 1.50% per annum depending upon our Consolidated Total Leverage Ratio, as defined in the Credit Facility.

 

Additionally, for Base Rate borrowings made under the U.S. Revolver, we may elect an optional interest rate equal to the one (1), two (2), three (3), or six (6) month LIBOR rate, plus a margin above that rate. In connection with this election, we are also required to elect an interest period that corresponds with the underlying LIBOR rate that was elected. The margin is currently 2.00% per annum and can range from 1.50% to 2.50% per annum depending upon our Consolidated Total Leverage Ratio, as defined in the Credit Facility.

 

Current unused commitment fees on the revolving credit facilities are 0.45% per annum. The unused commitment fees can range from 0.35% to 0.50% per annum, again depending upon our Consolidated Total Leverage Ratio.

 

As of September 30, 2015, there were no outstanding borrowings under the U.S. Revolver, while outstanding borrowings under the Canadian Revolver carried an interest rate equal to the Canadian Prime rate, plus 1.00% (3.70% at September 30, 2015). Borrowings under the Term Loan carried an interest rate equal to the Base Rate, plus 1.00% (4.25% at September 30, 2015).

Financial covenants under the Credit Facility are as follows:

 

Maximum Consolidated Total Leverage Ratio

 

On the last day of each fiscal quarter, our Consolidated Total Leverage Ratio (the ratio of our outstanding debt to our trailing twelve-month earnings before interest, income taxes, depreciation, amortization and stock-based compensation), as more fully defined in the Credit Facility, must not be greater than 3.50:1.0, or 4.00:1.0 under a one-time request by us subsequent to an acquisition that meets the requirements under the Credit Facility. At September 30, 2015, this ratio was 1.41:1.

 

Minimum Consolidated Interest Coverage Ratio

 

On the last day of each fiscal quarter, our Consolidated Interest Coverage Ratio (the ratio of our trailing twelve-month earnings before interest, income taxes, depreciation, amortization and stock-based compensation to our cash interest expense for the same period), as more fully defined in the Credit Facility, must not be less than 3.00:1.0. At September 30, 2015, this ratio was 17.05:1.

 

At September 30, 2014, we were in compliance with these covenants.

 

Substantially all of our assets, including the capital stock and assets of wholly-owned subsidiaries, secure obligations under the Credit Facility.

 

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Equipment Financing Facilities

 

As of September 30, 2015, there was a total of $25.5 million outstanding under prior equipment financing facilities, with fixed interest rates ranging from 2.33% to 4.49% and payments due through September 2021. The Company’s prior equipment financing facility matured on October 1, 2014.

 

Contractual Obligations

 

At September 30, 2015, contractual obligations were as follows (in millions):

 

   Fiscal Year Ended September 30, 
(dollars in millions)  2016   2017   2018   2019   2020   Thereafter 
Senior bank debt and revolver  $22.5   $174.4   $0.0   $0.0   $0.0   $0.0 
Equipment financing   5.1    5.0    4.2    4.3    4.3    2.6 
Operating leases   37.3    31.1    24.4    19.2    13.2    21.8 
Interest (1)   7.7    4.5    0.4    0.2    0.1    0.0 
Non-cancelable purchase obligations (2)   -    -    -    -    -    - 
Total  $72.6   $53.6   $206.7   $20.3   $15.7   $26.3 

 

(1)Interest payments reflect all currently scheduled amounts along with projected amounts to be paid under the senior bank debt as calculated using the current LIBOR rate at September 30, 2015 for all future periods.
(2)In general, we purchase products under purchase obligations that are cancelable by us without cost or expire after 30 days.

 

Capital Expenditures

 

We incurred capital expenditures of $20.8, $37.2, and $26.1 million in 2015, 2014, and 2013, respectively. In 2015, most of our capital expenditures focused on upgrading our distribution fleet of straight trucks which are equipped with specialized equipment, including cranes, hydraulic booms and conveyors. Historically, over 80% of our capital expenditures have generally been made for transportation and material handling equipment. We currently expect fiscal year 2016 capital expenditures to total approximately1.0% of net sales, mostly dependent upon our sales volume and exclusive of the impact of new branch openings.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Critical accounting policies

 

Critical accounting policies are those that are both important to the accurate portrayal of a company’s financial condition and results and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

 

In order to prepare financial statements that conform to accounting principles generally accepted in the United States, commonly referred to as U.S. GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations.

 

We have identified the following accounting policies that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial position and results of operations.

 

Business Combinations

 

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include future expected cash flows from customer relationships and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.

 

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Inventory Valuation

 

Product inventories represent one of our largest assets and are recorded at net realizable value. Our goal is to manage our inventory so that we minimize out of stock positions. To do this, we maintain an adequate inventory of up to 11,000 SKUs at each branch based on sales history. At the same time, we continuously strive to better manage our slower moving classes of inventory. We monitor our inventory levels by branch and record provisions for excess inventories based on slower moving inventory. We define potential excess inventory as the amount of inventory on hand in excess of the historical usage, excluding items purchased in the last three months. We then review our most recent history of sales and adjustments of such excess inventory and apply our judgment as to forecasted demand and other factors, including liquidation value, to determine the required adjustments to net realizable value. In addition, at the end of each year, we evaluate our inventory at each branch and write off and dispose of obsolete products. Our inventories are generally not susceptible to technological obsolescence.

 

During the year, we perform periodic cycle counts and write off excess or damaged inventory as needed. At year-end, we take a physical inventory and record any necessary additional write-offs.

 

Vendor Rebates

 

Typical arrangements with our vendors provide for us to receive a rebate of a specified amount after we achieve any of a number of measures generally related to the volume of our purchases over a period of time. These rebates are recorded as a reduction of inventory and reduction of cost of sales in the period in which we sell the product. Throughout the year, we estimate the amount of rebates receivable for the periodic programs based upon the expected level of purchases. We continually revise these estimates to reflect actual rebates earned based on actual purchase levels. Historically, our actual rebates have been within our expectations used for our estimates. If we fail to achieve a measure which is required to obtain a vendor rebate, we will have to record a charge in the period in which we determine the criteria or measure for the vendor rebate will not be met to the extent the vendor rebate was estimated and included as a reduction to cost of sales.

 

If market conditions were to change, vendors may change the terms of some or all of these programs. Although these changes would not affect the amounts which we have recorded related to products already purchased, it may impact our gross margin on products we sell or revenues earned in future periods.

 

Revenue Recognition

 

We recognize revenue when the following four basic criteria are met:

 

·persuasive evidence of an arrangement exists;

 

·delivery has occurred or services have been rendered;

 

·the price to the buyer is fixed or determinable; and

 

·collectability is reasonably assured.

 

 

We generally recognize revenue at the point of sale or upon delivery to the customer’s site. For goods shipped by third party carriers, we recognize revenue upon shipment since the terms are FOB shipping point. Approximately 84% of our revenues are for products delivered by us or picked up by our customers at our facilities, which provides for timely and accurate revenue recognition.

 

We also ship certain products directly from the manufacturer to the customer. Revenues are recognized upon notifications of deliveries from our vendors. Delays in receiving delivery notifications could impact our financial results, although it has not been material to our consolidated results of operations in the past.

 

We also provide certain job site delivery services, which include crane rentals and rooftop deliveries of certain products, for which the associated revenues are recognized upon completion of the services. These revenues represent less than 1% of our net sales.

 

All revenues recognized are net of sales taxes collected, allowances for discounts and estimated returns, which are provided for at the time of pick up or delivery. In the past, customer returns have not been material to our consolidated results of operations. All sales taxes collected are subsequently remitted to the appropriate government authorities.

 

Income Taxes

 

We account for income taxes using the liability method, which requires us to recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences between the financial statement and tax reporting bases of assets and liabilities to the extent that they are realizable. Deferred tax expense (benefit) results from the net change in deferred tax assets and liabilities during the year.

 

FASB ASC Topic 740, Income Taxes (“ASC 740”) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Based on this guidance, we analyze our filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. Tax benefits from uncertain tax positions are recognized if it is more likely than not that the position is sustainable based solely on its technical merits.

 

 33 

 

 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to certain market risks as part of our on-going business operations. Our primary exposure includes changes in interest rates and foreign exchange rates.

 

Interest Rate Risk

 

Our interest rate risk relates primarily to the variable-rate borrowings under our Credit Facility. The following discussion of our interest rate swaps (see “Financial Derivatives” below) is based on a 10% change in interest rates. These changes are hypothetical scenarios used to calibrate potential risk and do not represent our view of future market changes. As the hypothetical figures discussed below indicate, changes in fair value based on the assumed change in rates generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. The effect of a variation in a particular assumption is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which may magnify or counteract the sensitivities.

 

At September 30, 2015, we had $185.6 and $11.2 million of outstanding term loans and revolver borrowings, respectively, under our Credit Facility, and $25.5 million of equipment financing outstanding. Borrowings under our credit facility incur interest on a floating rate basis while borrowings under our equipment lease facilities incur interest on a fixed rate basis. In connection with the placement of our Credit Facility, we entered into an interest rate swap with a notional amount equal to our outstanding term loan that effectively converts our floating rate interest under the term loan to a fixed rate of 1.38%. In consideration of our hedging instruments, as of September 30, 2015, only the $11.2 million of borrowings under our revolvers were subject to variable floating interest rates.

 

As of September 30, 2015, our weighted-average effective interest rate was 3.38% on total debt outstanding, compared to 3.35% on total debt outstanding at September 30, 2014. At September 30, 2015, a hypothetical 10% increase in interest rates in effect at that date would have increased annual interest expense by approximately $0.05 million.

 

As discussed above, we enter into interest rate swaps to minimize the risks and costs associated with financing activities, as well as to maintain an appropriate mix of fixed-and floating-rate debt. The swap agreements discussed below are to effectively exchange variable-rate for fixed-interest rate payments over the life of the agreements. The aggregate fair value of these swaps represented an unrealized loss of $2.4 million at September 30, 2015.

 

Financial Derivatives

 

We use derivative financial instruments to manage its exposure related to fluctuating cash flows from changes in interest rates. Use of derivative financial instruments in hedging programs subjects us to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative instrument will change. In a hedging relationship, the change in the value of the derivative is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to derivatives represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of our derivative financial instruments is used to measure interest to be paid or received and does not represent our exposure due to credit risk. Our current derivative instruments are with large financial counterparties rated highly by nationally recognized credit rating agencies.

 

We use interest rate derivative instruments to manage the risk related to fluctuating cash flows from interest rate changes by converting a portion of its variable-rate borrowings into fixed-rate borrowings. As noted above, as of September 30, 2015 our outstanding interest rate derivative instruments included a $185.6 million interest rate swap with interest payments at a fixed rate of 1.38%. This interest rate swap is designated as a cash flow hedge and amortizes at $2.8 million per quarter and expires on March 31, 2017.

 

For derivative instruments designated as cash flow hedges, we record the effective portions of changes in their fair value, net of taxes, in other comprehensive income. The effectiveness of the hedges is periodically assessed by management during the lives of the hedges by 1) comparing the current terms of the hedges with the related hedged debt to assure they continue to coincide and 2) through an evaluation of the ability of the counterparties to the hedges to honor their obligations under the hedges. Any ineffective portions of the hedges are recognized in earnings through interest expense, financing costs and other.

 

 34 

 

 

We record any differences paid or received on its interest rate hedges as adjustments to interest expense, financing costs and other. The table below presents the combined fair values of the interest rate derivative instruments:

 

     Unrealized Losses    
   Location on  September 30,   September 30,   Fair Value
Instrument  Balance Sheet  2015   2014   Hierarchy
      (dollars in thousands)    
Designated interest rate swaps (effective)  Accrued expenses  $2,358   $2,124   Level 2

 

The fair values of the interest rate hedges were determined through the use of pricing models, which utilize verifiable inputs such as market interest rates that are observable at commonly quoted intervals (generally referred to as the “LIBOR Curve”) for the full terms of the hedge agreements. These values reflect a Level 2 measurement under the applicable fair value hierarchy.

 

The table below presents the amounts of gain (loss) on the interest rate derivative instruments recognized in other comprehensive income (OCI):

 

(dollars in thousands)  2015   2014   2013 
Amount of Gain (Loss) Recognized in OCI (net of tax)               
Designated interest rate swaps  $(138)  $972   $1,399 
Non-designated interest rate swaps (reclassified from accumulated OCI)   -    -    - 

 

We did not have any gain or loss amounts on the interest rate derivative instruments recognized in interest expense, financing costs, and other for the years ended September 30, 2015 and 2014, and $7,000 in 2013.

 

Foreign Currency Exchange Rate Risk

 

We have exposure to foreign currency exchange rate fluctuations for revenues generated by our operations outside the United States, which can adversely impact our net income and cash flows. Approximately 7.3% of our revenues in 2015 were derived from sales to customers in Canada. This business is primarily conducted in the local currency. This exposes us to risks associated with changes in foreign currency that can adversely affect revenues, net income and cash flows. We do not enter into financial instruments to manage this foreign currency exchange risk.

 35 

 

 

 

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

BEACON ROOFING SUPPLY, INC.

 

Index to consolidated financial statements

 

    Page
Report of Independent Registered Public Accounting Firm   37
Consolidated Balance Sheets as of September 30, 2015 and 2014   38
Consolidated Statements of Operations for the Years Ended September 30, 2015, 2014 and 2013   39
Consolidated Statements of Comprehensive Income for the Years Ended September 30, 2015, 2014 and 2013   40
Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2015, 2014 and 2013   41
Consolidated Statements of Cash Flows for the Years Ended September 30, 2015, 2014 and 2013   42
Notes to Consolidated Financial Statements   43

 

 36 

 

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders of

Beacon Roofing Supply, Inc.

 

We have audited the accompanying consolidated balance sheets of Beacon Roofing Supply, Inc. (the Company) as of September 30, 2015 and 2014 and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Beacon Roofing Supply, Inc. at September 30, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2015, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Beacon Roofing Supply, Inc.’s internal control over financial reporting as of September 30, 2015, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 24, 2015 expressed an unqualified opinion thereon. 

 

  /s/ ERNST & YOUNG LLP

 

McLean, Virginia

November 24, 2015

 

 37 

 

 

BEACON ROOFING SUPPLY, INC.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

   September 30,   September 30, 
   2015   2014 
ASSETS          
Current assets:          
Cash and cash equivalents  $45,661   $54,472 
Accounts receivable, less allowance of $6,298 and $8,510 at September 30, 2015 and September 30, 2014, respectively   399,732    360,802 
Inventories, net   320,999    301,626 
Prepaid expenses and other current assets   97,928    66,828 
Deferred income taxes   2,309    14,610 
Total current assets   866,629    798,338 
           
Property and equipment, net   90,405    88,565 
Goodwill   496,415    466,206 
Intangibles, net   87,055    72,266 
Other assets, net   5,408    8,521 
TOTAL ASSETS  $1,545,912   $1,433,896 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $244,891   $220,834 
Accrued expenses   124,794    80,285 
Borrowings under revolving lines of credit   11,240    18,514 
Current portions of long-term obligations   16,320    16,602 
Total current liabilities   397,245    336,235 
           
Senior notes payable, net of current portion   174,375    185,625 
Deferred income taxes   68,809    64,100 
Long-term obligations under equipment financing and other, net of current portion   22,367    30,835 
Total liabilities   662,796    616,795 
           
Commitments and contingencies          
           
Stockholders’ equity:          
Common stock (voting); $0.01 par value; 100,000,000 shares authorized; 49,790,743 issued and outstanding at September 30, 2015; and 49,392,774 issued and outstanding at September 30, 2014   497    493 
Undesignated Preferred Stock; 5,000,000 shares authorized, none issued or outstanding   -    - 
Additional paid-in capital   345,934    328,059 
Retained earnings   557,405    495,128 
Accumulated other comprehensive income (loss)   (20,720)   (6,579)
Total stockholders’ equity   883,116    817,101 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $1,545,912   $1,433,896 

 

See accompanying notes.

 

 38 

 

 

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Operations

(in thousands, except share and per share amounts)

 

   Year Ended September 30, 
   2015   2014   2013 
Net sales  $2,515,169   $2,326,905   $2,240,723 
Cost of products sold   1,919,804    1,799,065    1,709,326 
Gross profit   595,365    527,840    531,397 
Operating expenses   478,284    428,977    401,676 
Income from operations   117,081    98,863    129,721 
Interest expense, financing costs and other   11,037    10,095    8,247 
Income before provision for income taxes   106,044    88,768    121,474 
Provision for income taxes   43,767    34,922    48,867 
Net income  $62,277   $53,846   $72,607 
                
Net income per share:               
Basic  $1.26   $1.09   $1.50 
Diluted  $1.24   $1.08   $1.47 
                
Weighted average shares used in computing net income per share:               
Basic   49,578,130    49,227,466    48,472,240 
Diluted   50,173,478    49,947,699    49,385,335 

 

See accompanying notes.

 

 39 

 

 

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Comprehensive Income

(in thousands)

 

   Year Ended September 30, 
   2015   2014   2013 
Net income  $62,277   $53,846   $72,607 
Other comprehensive income/(loss):               
Foreign currency translation adjustment   (14,003)   (7175)   (4,401)
Unrealized (loss)/gain due to change in fair value of derivatives, net of tax expense of $(76), $635 and $868, respectively   (138)   972    1,399 
Total other comprehensive income (loss), net of tax   (14,141)   (6,203)   (3,002)
Total comprehensive income  $48,136   $47,643   $69,605 

 

See accompanying notes.

 

 40 

 

 

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

 

               Accumulated     
   Common Stock   Additional       Other   Total 
   Number       Paid-in   Retained   Comprehensive   Stockholders’ 
   of Shares   Amount   Capital   Earnings   Income (Loss)   Equity 
Balances at September 30, 2011   46,154,107    462    248,260    293,110    (3,405)   538,427 
                               
Issuance of common stock   1,513,040    15    24,051              24,066 
Stock-based compensation             7,873              7,873 
Net income                  75,565         75,565 
Foreign currency translation adjustment                       5,283    5,283 
Unrealized gain on financial derivatives, net                       748    748 
Balances at September 30, 2012   47,667,147    477    280,184    368,675    2,626    651,962 
                               
Issuance of common stock   1,231,475    11    23,512              23,523 
Stock-based compensation             9,266              9,266 
Net income                  72,607         72,607 
Foreign currency translation adjustment                       (4,401)   (4,401)
Unrealized gain on financial derivatives, net                       1,399    1,399 
Balances at September 30, 2013   48,898,622    488    312,962    441,282    (376)   754,356 
                               
Issuance of common stock   494,152    5    7,675              7,680 
Stock-based compensation             7,422              7,422 
Net income                  53,846         53,846 
Foreign currency translation adjustment                       (7,175)   (7175)
Unrealized gain on financial derivatives, net                       972    972 
Balances at September 30, 2014   49,392,774   $493   $328,059   $495,128   $(6,579)  $817,101 
                               
Issuance of common stock   397,969    4    7,939              7,943 
Stock-based compensation             9,936              9,936 
Net income                  62,277         62,277 
Foreign currency translation adjustment                       (14,003)   (14,003)
Unrealized gain on financial derivatives, net                       (138)   (138)
Balances at September 30, 2015   49,790,743    497    345,934    557,405    (20,720)   883,116 

 

See accompanying notes.

 

 41 

 

 

BEACON ROOFING SUPPLY, INC.

Consolidated Statements of Cash Flows

(in thousands)

 

   Year Ended September 30, 
   2015   2014   2013 
Operating activities               
Net income  $62,277   $53,846   $72,607 
Adjustments to reconcile net income to net cash provided by operating activities:               
Depreciation and amortization   34,862    30,294    30,415 
Stock-based compensation   9,936    7,422    9,266 
Certain interest expense and other financing costs   (1,450)   816    (1,541)
Gain on sale of fixed assets   (1,107)   (1,323)   (1,487)
Deferred income taxes   17,634    3,078    4,416 
Other   263    129    - 
Changes in assets and liabilities, net of the effects of businesses acquired:               
Accounts receivable   (33,251)   (32,984)   (22,790)
Inventories   (9,203)   (50,846)   (16,033)
Prepaid expenses and other assets   (17,119)   (4,790)   8,343 
Accounts payable and accrued expenses   46,498    49,855    (4,703)
Net cash provided by operating activities   109,340    55,497    78,493 
                
Investing activities               
Purchases of property and equipment   (20,802)   (37,239)   (26,120)
Acquisition of businesses   (85,301)   (1,514)   (64,606)
Proceeds from sales of assets   1,389    1,437    1,235 
Net cash used in investing activities   (104,714)   (37,316)   (89,491)
                
Financing activities               
Borrowings under revolving lines of credit   560,634    497,500    455,576 
Payments under revolving lines of credit   (566,007)   (525,126)   (449,280)
Borrowings under equipment financing facilities and other   -    25,377    3,993 
Repayments under equipment financing facilities and other   (5,553)   (5,009)   (4,549)
Borrowings under senior term loan   -    -    - 
Repayments under senior term loan   (11,250)   (11,250)   (11,250)
Proceeds from exercise of options   7,943    7,680    18,579 
Excess tax benefit from equity-based compensation   1,526    1,030    4,944 
Net cash (used in) provided by financing activities   (12,707)   (9,798)   18,013 
                
Effect of exchange rate changes on cash   (730)   (938)   (193)
Net increase (decrease) in cash and cash equivalents   (8,811)   7,445    6,822 
Cash and cash equivalents, beginning of year   54,472    47,027    40,205 
Cash and cash equivalents, end of year  $45,661   $54,472   $47,027 
 Supplemental cash flow information               
Cash paid during the year for:               
Interest  $8,276   $9,312   $12,012 
Income taxes, net of refunds  $23,198   $23,478   $29,680 

 

See accompanying notes.

 

 42 

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

1. The Company 

 

Business

 

Beacon Roofing Supply, Inc. (the “Company”) is a leading distributor of residential and non-residential roofing materials and other complementary building materials to customers in 42 states within the United States and six provinces in Canada. The Company operates its business under regional and local trade names. The Company’s current subsidiaries are Beacon Sales Acquisition, Inc., Beacon Canada, Inc. and Beacon Roofing Supply Canada Company. The Company was formed on August 22, 1997 and is incorporated in Delaware.

 

Estimates

 

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the consolidated financial statements. Actual amounts could differ from those estimates.

 

2. Summary of Significant Accounting Policies

 

Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company transactions have been eliminated.

 

Fiscal Year

 

The fiscal years presented are the years ended September 30, 2015 (“2015”), September 30, 2014 (“2014”), and September 30, 2013 (“2013”). Each of the Company’s first three quarters ends on the last day of the calendar month.

 

Industry Segment Information

 

Based on qualitative and quantitative criteria, the Company has determined that it operates within one reportable segment, which is the wholesale distribution of building materials.  Please refer to the “Goodwill” summary below for discussion of the Company’s reporting unit and the related impairment review.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents also include unsettled credit card transactions. Cash equivalents are comprised of money market funds which invest primarily in commercial paper or bonds with a rating of A-1 or better, and bank certificates of deposit.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivables are recorded at invoiced amounts and generally do not bear interest. The allowance for doubtful accounts reflects the Company’s estimate of credit exposure, determined principally on the basis of its collection experience, aging of its receivables and significant individual account credit risk.

 

Inventories and Rebates

 

Inventories, consisting substantially of finished goods, are valued at the lower of cost or market (net realizable value). Cost is determined using the moving weighted-average cost method.

 

 43 

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

The Company’s arrangements with vendors typically provide for rebates after it makes a special purchase and/or monthly, quarterly and/or annual rebates of a specified amount of consideration payable when a number of measures have been achieved. Annual rebates are generally related to a specified cumulative level of purchases on a calendar-year basis. The Company accounts for such rebates as a reduction of the inventory value until the product is sold, at which time such rebates reduce cost of sales in the consolidated statements of operations. Throughout the year, the Company estimates the amount of the periodic rebates based upon the expected level of purchases. The Company continually revises these estimates to reflect actual rebates earned based on actual purchase levels. Amounts due from vendors under these arrangements as of September 30, 2015 and September 30, 2014 totaled $76.8 million and $58.4 million, respectively, and are included in “Prepaid expenses and other current assets” in the accompanying consolidated balance sheets.

 

Property and Equipment

 

Property and equipment acquired in connection with acquisitions are recorded at fair value as of the date of the acquisition and depreciated utilizing the straight-line method over the estimated remaining lives. All other additions are recorded at cost, and depreciation is computed using the straight-line method over the following estimated useful lives:

 

Asset Class   Estimated Useful Life
Buildings and improvements   40 years
Equipment   3 to 7 years
Furniture and fixtures   7 years
Leasehold improvements   Shorter of the estimated useful life or the term of the lease, considering renewal options expected to be exercised.

 

In accordance with its policy, the Company reviews the estimated useful lives of its fixed assets on an ongoing basis. This review indicated that the actual lives of certain distribution fleet equipment were longer than the estimated useful lives used for depreciation purposes in the Company’s financial statements. As a result, effective January 1, 2014, the Company changed its estimates of the useful lives of its distribution fleet equipment (included in the equipment asset class) to better reflect the estimated periods during which these assets will remain in service. The estimated useful lives of the Company’s distribution fleet equipment that previously averaged five years were adjusted to an average of seven years. The effect of this change in estimate was to reduce 2014 depreciation expense by $3.1 million, increase 2014 net income by $1.9 million, and increase 2014 basic and diluted earnings per share by $0.04.

 

Business Combinations

 

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include future expected cash flows from customer relationships and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed.

 

Revenue Recognition

 

The Company recognizes revenue when the following four basic criteria are met:

 

·persuasive evidence of an arrangement exists;

 

·delivery has occurred or services have been rendered;

 

·the price to the buyer is fixed and determinable; and

 

·collectability is reasonability assured.

 

Based on these criteria, the Company generally recognizes revenue at the point of sale or upon delivery to the customer site. For goods shipped by third party carriers, the Company recognizes revenue upon shipment since the terms are generally FOB shipping point. The Company also arranges for certain products to be shipped directly from the manufacturer to the customer. The Company recognizes the gross revenue for these sales upon shipment as the terms are FOB shipping point.

 

 44 

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

The Company also provides certain job site delivery services, which include crane rentals and rooftop deliveries of certain products, for which the associated revenues are recognized upon completion of the services. These revenues represent less than 1% of the Company’s sales.

 

All revenues recognized are net of sales taxes collected, allowances for discounts and estimated returns. Sales taxes collected are subsequently remitted to the appropriate government authorities.

 

Shipping and Handling Costs

 

The Company classifies shipping and handling costs, consisting of driver wages and vehicle expenses, as operating expenses in the accompanying consolidated statements of operations. Shipping and handling costs were approximately $120.8 million in 2015, $111.6 million in 2014 and $103.5 million in 2013.

 

Financial Derivatives

 

The Company enters into interest rate swaps to minimize the risks and costs associated with financing activities, as well as to maintain an appropriate mix of fixed-rate and floating-rate debt. The swap agreements are contracts to exchange variable-rate for fixed-interest rate payments over the life of the agreements. The Company's current derivative instruments are designated as cash flow hedges, for which the Company records the effective portions of changes in their fair value, net of tax, in other comprehensive income. The Company recognizes any ineffective portion of the hedges in earnings through interest expense, financing costs and other.

 

Concentrations of Risk

 

Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of accounts receivable. The Company’s accounts receivable are primarily from customers in the building industry located in the United States and Canada. Concentration of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company’s customer base. The Company performs credit evaluations of its customers; however, the Company’s policy is not to require collateral. At September 30, 2015 and 2014, the Company had no significant concentrations of credit risk.

 

The Company purchases a major portion of its products from a small number of vendors. Approximately two-thirds of the Company’s total cost of inventory purchases was made from 19 vendors in 2015, 12 vendors in 2014, and 11 vendors in 2013.In addition, more than 10% of the total cost of purchases was made from two vendors in 2015, and from each of three vendors in 2014 and 2013.

 

Impairment of Long-Lived Assets

 

Impairment losses are required to be recorded on long-lived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying value. If such assets are considered to be impaired, the impairment to be recognized is the total by which the carrying value exceeds the fair value of the assets.

 

Amortizable and Other Intangible Assets

 

The Company amortizes its identifiable intangible assets, currently consisting of non-compete agreements and customer relationships because these assets have finite lives. Non-compete agreements are amortized on a straight-line basis over the terms of the associated contractual agreements; customer relationship assets are amortized on an accelerated basis based on the expected cash flows generated by the existing customers; and deferred financing costs are amortized over the lives of the associated financings using the effective interest method. Certain trademarks are not amortized because they have indefinite lives. The Company evaluates its trademarks for impairment on an annual basis based on the fair value of the underlying assets.

 

 45 

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

The Company applied the provisions of Accounting Standards No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, which permits an entity the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired.

 

Based on management’s evaluation performed as of August 31, 2015, the Company concluded that there were no indicators of impairment and therefore it was more likely than not that the fair value of the goodwill and indefinite-lived intangible assets exceeded the net carrying amount and there was no reason to perform the two-step impairment test. For the evaluation of trademarks, the main factor reviewed was the revenue base, which was relied upon in applying the royalty savings method at inception, to be derived from covered product sales made under the trademarks. The Company also reviewed the latest projected revenues. In addition, there have been no specific events or circumstances that management believes have negatively affected the value of the trademarks. 

 

Goodwill

 

The Company tests goodwill for impairment in the fourth quarter of each fiscal year or at any other time when impairment indicators exist. Examples of such indicators include a significant change in the business climate, unexpected competition, loss of key personnel or a decline in the Company’s market capitalization below the Company’s net book value.

 

The Company performs a qualitative assessment based on economic, industry and company-specific factors as the initial step in the annual goodwill impairment test for all or selected reporting units. Based on the results of the qualitative assessment, the Company is only required to perform Step 1 of the annual impairment test for a reporting unit if the company concludes that it is more likely than not that the unit’s fair value is less than its carrying amount.

 

To the extent the Company concludes it is more likely than not that a reporting unit’s fair value is less than its carrying amount, the two-step approach is applied. The first step would require a comparison of each reporting unit’s fair value to the respective carrying value. If the carrying value exceeds the fair value, a second step is performed to measure the amount of impairment loss, if any.

 

The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component (i.e. a business for which discrete financial information is available and regularly reviewed by component managers). The Company currently has five components which it evaluates for aggregation.

 

The Company evaluates the distribution methods, sales mix, and operating results of each of its components to determine if these characteristics have or will be sustained over a long-term basis. For purposes of this evaluation, the Company would expect its components to exhibit similar economic characteristics 3-5 years after events such as an acquisition within the Company’s core roofing business or management/business restructuring. This evaluation also considers major storm activity or local economic challenges that may impact the short term operations of an individual component. Components that exhibit similar economic characteristics are subsequently aggregated into a single reporting unit.

 

Based on the Company’s evaluation at August 31, 2015, it was determined that all of the Company’s components exhibited similar economic characteristics and therefore the components were aggregated into a single reporting unit (collectively the “Reporting Unit”).

 

The Company concluded that the fair value of the Reporting Unit has more likely than not exceeded its respective carrying value at the goodwill measurement date. This position is consistent with the 2015 operating results in which sales for the Reporting Unit exceeded those in the prior year by 8.1%. In addition, gross profit, as compared to prior year, increased by 12.8%. The increase in the gross margin reflects pricing increases across the Company’s complementary products as a result of increased demand and the impact of our acquisitions in fiscal 2015, combined with a favorable shift in our sales mix in 2015 towards residential and complementary products, which generally have higher gross margins than our non-residential products. The Company’s analysis further noted the total market capitalization exceeded the Company’s carrying value by approximately 106% at August 31, 2015. This compares to 73% and 140% for that same measure at August 31, 2014 and 2013, respectively. In addition, we did not identify any macroeconomic or industry conditions or cost related factors that would indicate the fair value of the Reporting Unit was more likely than not to be less than its respective carrying value.

 

 46 

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

Lastly, there have been no events or circumstances since the date of the above assessments that would change the Company’s conclusion. If circumstances change or events occur to indicate it is more likely than not that the fair value of the Reporting Unit (under the guidelines discussed above) has fallen below its carrying values, the Company would test such Reporting Unit for impairment.

 

Stock-Based Compensation

 

The Company accounts for employee and non-employee director stock-based compensation using the fair value method of accounting. Compensation cost arising from stock options and restricted stock awards granted to employees and non-employee directors is recognized using the straight-line method over the vesting period, which represents the requisite service or performance period. In calculating the expense related to stock-based compensation, the Company estimates option forfeitures and projects the number of restricted shares and units that are expected to vest based on the related performance measures.

 

The Company recorded stock-based compensation expense of $9.9 million ($5.8 million, net of tax) or $0.12 per basic share and per diluted share in 2015, $7.4 million ($4.5 million, net of tax) or $0.09 per basic share and per diluted share in 2014, and $9.3 million ($5.6 million, net of tax) or $0.11 per basic share and per diluted share in 2013. At September 30, 2015, the Company had $24.3 million of excess tax benefits available for potential deferred tax write-offs related to previously recognized stock-based compensation.

 

Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) consisted of the following:

 

   September 30,   September 30, 
   2015   2014 
Foreign currency translation adjustment  $(19,293)  $(5,290)
           
Unrealized loss on financial derivatives   (2,344)   (2,130)
Tax effect   917    841 
Unrealized loss on financial derivatives, net   (1,427)   (1,289)
Accumulated other comprehensive (loss) gain  $(20,720)  $(6,579)

 

Net Income per Share

 

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents then outstanding using the treasury stock method. Common equivalent shares consist of the incremental common shares issuable upon the exercise of stock options and conversion of restricted stock units.

 

 47 

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

The following table reflects the calculation of weighted average shares outstanding for each period presented:

 

   Year Ended September 30, 
   2015   2014   2013 
Weighted-average common shares outstanding for basic   49,578,130    49,227,466    48,472,240 
Effect of dilutive securities:               
Stock option awards   481,039    605,487    814,802 
Restricted share awards   114,309    114,746    98,293 
Weighted-average shares assuming dilution   50,173,478    49,947,699    49,385,335 

 

The following table includes the number of shares that may be dilutive common shares in the future. These shares were not included in the computation of diluted earnings per share because the effect was either antidilutive or the performance condition was not met.

 

   Year Ended September 30,     
   2015   2014   2013 
Stock options awards   1,313,689    925,003    1,558,114 
Restricted stock awards       21,321    137,091 

 

Fair Value of Financial Instruments

 

Financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, borrowings under the Company’s revolving lines of credit, equipment financing facilities, financial derivatives and long-term debt. Except for the financial derivatives and long-term debt, these instruments are short-term in nature and their carrying amounts approximate their fair value. With respect to the long-term debt, we believe that the fair values of these obligations, including current maturities, approximate their carrying values based on their effective interest rates compared to current market rates. See Note 16 for disclosures of the Company’s financial derivatives that are recorded at fair value.

 

Income Taxes

 

The Company accounts for income taxes using the liability method, which requires it to recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences between the financial statement and tax reporting bases of assets and liabilities to the extent that they are realizable. Deferred tax expense (benefit) results from the net change in deferred tax assets and liabilities during the year.

 

FASB ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Based on this guidance, the Company analyzes its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. Tax benefits from uncertain tax positions are recognized if it is more likely than not that the position is sustainable based solely on its technical merits.

 

Foreign Currency Translation

 

The assets and liabilities of the Company’s Canadian operations are translated into United States dollars at current exchange rates as of the balance sheet date, and revenues and expenses are translated at average monthly exchange rates. Net unrealized translation gains or losses associated with the Canadian net assets are recorded directly to a separate component of stockholders’ equity. Realized gains and losses from foreign currency transactions were not material for any of the periods presented. The Company has inter-company receivables from the Company’s Canadian subsidiary, for which the short-term portion is marked to market each period with a corresponding entry recorded as a component of the consolidated statement of operations. Since repayment of the long-term portion is not planned or anticipated in the foreseeable future, the long-term balances are marked to market each period with a corresponding entry recorded as a separate component of stockholders’ equity.

 

 48 

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition”. ASU 2014-09 clarifies the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The core principle of this updated guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new rule also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein, which is effective for the Company beginning October 1, 2018, the first day of the Company’s 2019 fiscal year. The Company is currently evaluating the impact of this accounting guidance and does not expect any significant impact on its consolidated financial statements.

 

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or are available to be issued. This ASU also requires management to disclose certain information depending on the results of the going concern evaluation. The provisions of this ASU are effective for annual periods ending after December 15, 2016, including interim reporting periods therein, which are effective for the Company beginning October 1, 2016, the first day of the Company’s 2017 fiscal year. The Company is currently evaluating the impact of this accounting guidance and does not expect any significant impact on its consolidated financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2015, and early adoption is permitted. The provisions of ASU 2015-03 are not expected to have a material effect on the Company’s financial condition.

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”), which applies to inventory valued at first-in, first-out (FIFO) or average cost. ASU 2015-11 requires inventory to be measured at the lower of cost and net realizable value, rather than at the lower of cost or market. ASU 2015-11 is effective on a prospective basis for annual periods, including interim reporting periods within those periods, beginning after December 15, 2016. The Company reports inventory on an average-cost basis and thus will be required to adopt the standard; however, the provisions of ASU 2015-11 are not expected to have a material effect on the Company’s financial condition.

 

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. In addition, separate presentation on the face of the income statement or disclosure in the notes is required regarding the portion of the adjustment recorded in the current period earnings, by line item, that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is to be applied prospectively for measurement period adjustments that occur after the effective date. ASU 2015-16 is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2015, and early adoption is permitted and the Company intends to adopt in fiscal year 2016. Since it is prospective, the impact of ASU 2015-16 on the Company’s financial condition and earnings will depend upon the nature of any measurement period adjustments identified in future periods.

 

 49 

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

3. Goodwill, Intangibles and Other Assets

 

A summary of changes in the Company’s goodwill during the years ended September 30, 2015 and 2014 is as follows (in thousands):

 

   September 30, 2013   Acquisitions   Dispositions   Translation and
Other Adjustments
   September 30, 2014   Acquisitions   Dispositions   Translation and
Other

Adjustments
   September 30, 2015 
Goodwill   469,203    -    -    (2,997)   466,206    34,465    -    (4,256)   496,415 

 

There have been no impairments of our goodwill.

 

Intangibles and other assets, included in other long-term assets, consisted of the following:

 

   September 30,   September 30,   Weighted
Average
Remaining
 
   2015   2014   Life 
Amortizable intangible assets:               
Non-compete agreements  $2,824   $2,824    4.25 
Customer relationships   191,852    162,599    15.10 
Trademarks   1,100         4.28 
Beneficial lease arrangements   610    610      
    196,386    166,033      
Less: accumulated amortization   (119,081)   (101,727)     
    77,305    64,306      
Amortizable other assets:               
Deferred financing costs   8,134    5,550    1.52 
Less: accumulated amortization   (3,959)   (3,056)     
    4,175    2,494      
                
Indefinite-lived trademarks   9,750    9,750      
Other assets   1,233    4,237      
Total other assets, net  $92,463   $80,787      

 

Amortization expense related to intangible assets amounted to approximately $16.2 million, $14.1 million, and $15.1 million in 2015, 2014, and 2013, respectively. The intangible lives range from one to twenty years and the weighted average remaining life was 14.6 years at September 30, 2015.

 

 50 

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

Estimated future annual amortization for the above intangible assets as of September 30, 2015 is as follows:

 

   Future 
Year ending September 30,  Amortization 
2016   13,235 
2017   12,389 
2018   10,312 
2019   8,396 
2020   6,905 
Thereafter   26,068 
Total future amortization  $77,305 

 

4. Acquisitions

 

On October 1, 2014, the Company purchased certain assets of Applicators Sales & Service (“Applicators”), a distributor of residential roofing, siding, windows and related accessories with four locations in Maine and one location in New Hampshire and annual sales of approximately $48 million.

 

On October 15, 2014, the Company purchased certain assets of Wholesale Roofing Supply (“WRS”), a distributor of residential roofing products with a single nine-acre facility located in Grand Prairie, Texas and annual sales of approximately $34 million.

 

On June 1, 2015, the Company purchased certain assets of ProCoat Systems, Inc. ("ProCoat"), a distributor of residential and non-residential exterior building materials including stucco, stone, waterproofing and concrete restoration with branches located in Denver and Ft. Collins, Colorado with annual sales of approximately $23 million.

 

The Company has recorded the acquired assets and liabilities at their estimated fair values at the acquisition date, with resulting goodwill of $34.5 million (which is not deductible for tax purposes) and $31.8 million in intangible assets associated with these acquisitions.

 

5. Prepaid Expenses and Other Current Assets

 

The significant components of prepaid expenses and other current assets were as follows:

 

   September 30,   September 30, 
   2015   2014 
Vendor rebates  $76,826   $58,363 
Other   21,102    8,465 
   $97,928   $66,828 

 

 51 

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

6. Property and Equipment, net

 

Property and equipment, net, consisted of the following:

 

   September 30,   September 30, 
   2015   2014 
Land  $3,201   $3,300 
Buildings and leasehold improvements   28,757    28,148 
Equipment   189,739    178,123 
Furniture and fixtures   15,762    15,606 
    237,459    225,177 
Less: accumulated depreciation and amortization   (147,054)   (136,612)
   $90,405   $88,565 

 

Depreciation and amortization of property and equipment totaled $18.7 million, $16.2 million, and $16.4 million in 2015, 2014, and 2013, respectively.

 

7. Accrued Expenses

 

The significant components of accrued expenses were as follows:

 

   September 30,   September 30, 
   2015   2014 
Uninvoiced inventory receipts  $37,501   $23,744 
Employee-related accruals   31,836    24,463 
Other   55,457    32,078 
   $124,794   $80,285 

 

 52 

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

8. Financing Arrangements

 

Financing arrangements consisted of the following:

 

   September 30,
2015
   September 30,
2014
 
Senior Secured Credit Facility          
Revolving Lines of Credit:          
Canadian revolver-expires March 31, 2017 (effective rate on borrowings 3.70% at September 30, 2015 and 4.00% at September 30, 2014  $11,240   $10,714 
U.S. Revolver-expires March 31, 2017 (effective rate on borrowings of 0.00% at September 30, 2015 and 4.25% at September 30, 2014)   0    7,800 
Term Loan:          
Term Loan-matures March 31, 2017 (4.25% at September 30, 2015 and 2.15% on September 30, 2014)   185,625    196,875 
Total borrowings under Senior Secured Credit Facility   196,865    215,389 
Less: current portion   (22,490)   (29,764)
Total long-term portion of borrowings under Senior Secured Credit Facility  $174,375   $185,625 
           
Equipment Financing Facilities          
Borrowings under various equipment financing facilities-various maturities through September 2021 (various fixed interest rates ranging from 2.33% to 4.49% at September 30, 2015, and various fixed interest rates ranging from 2.33% to 4.60% at September 30, 2014)  $25,488   $30,966 
Less: current portion   (5,069)   (5,352)
Total long-term portion of borrowings under equipment financing facilities  $20,419   $25,614 

 

Senior Secured Credit Facility

 

On April 5, 2012, the Company replaced its prior credit facility with a new five-year senior secured credit facility that includes a $550 million United States credit facility (individually, the “U.S. Credit Facility”) and a C$15 million ($11.2 million at September 30, 2015) Canadian credit facility (individually, the “Canadian Revolver”) with Wells Fargo Bank, National Association, and a syndicate of other lenders (combined, the “Credit Facility”).

 

The $550 million U.S Credit Facility consists of a revolving credit facility of $325 million (the “U.S. Revolver”), which includes a sub-facility of $20 million for letters of credit, and a $225 million term loan (the “Term Loan”). The Term Loan has required amortization of 5% per year that is payable in quarterly installments, with the balance due on March 31, 2017. The Company may increase the Credit Facility by up to $200 million under certain conditions. There were no outstanding borrowings under the U.S. Revolver at September 30, 2015; there was C$15.0 million ($11.2 million) and $185.6 million outstanding under the Canadian Revolver and Term Loan, respectively, at September 30, 2015. There were $4.9 million of outstanding standby letters of credit at September 30, 2015. As of October 1, 2015, we refinanced our existing debt into $300 million aggregate principal amount of 6.375% Senior Notes due 2023, borrowings under a $450 million Term Loan B LIBOR based facility due 2022, and a $700 million asset based lending revolving credit facility.

 

 53 

 

 

BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

Interest

 

The Credit Facility provides for borrowings under the Company’s U.S. Revolver and Canadian Revolver at a Base Rate. The Base Rate for borrowings under the U.S. Revolver is defined as the higher of the Prime Rate, or the Federal Funds Rate plus 0.50%, plus a margin above that rate. For borrowings made under the Canadian Revolver, the Base Rate is defined as the higher of the Canadian Prime Rate, or the annual rate of interest equal to the sum of the CDOR rate plus 1.00%, plus a margin above that rate. The margin for both base rates is currently 1.00% per annum and can range from 0.50% to 1.50% per annum depending upon the Company’s Consolidated Total Leverage Ratio, as defined in the Credit Facility.

 

Additionally, for Base Rate borrowings made under the U.S. Revolver, the Company may elect an optional interest rate equal to the one (1), two (2), three (3), or six (6) month LIBOR rate, plus a margin above that rate. In connection with this election, the Company is also required to elect an interest period that corresponds with the underlying LIBOR rate that was elected. The margin is currently 2.00% per annum and can range from 1.50% to 2.50% per annum depending upon the Company’s Consolidated Total Leverage Ratio, as defined in the Credit Facility.

 

Current unused commitment fees on the revolving credit facilities are 0.45% per annum. The unused commitment fees can range from 0.35% to 0.50% per annum, again depending upon the Company’s Consolidated Total Leverage Ratio.

 

As of September 30, 2015, there were no outstanding borrowings under the U.S. Revolver, while outstanding borrowings under the Canadian Revolver carried an interest rate equal to the Canadian Prime rate, plus 1.00% (3.70% at September 30, 2015). Borrowings under the Term Loan carried an interest rate equal to the Base Rate, plus 1.00% (4.25% at September 30, 2015).

 

Financial covenants under the Credit Facility are as follows:

 

Maximum Consolidated Total Leverage Ratio

 

On the last day of each fiscal quarter, the Company’s Consolidated Total Leverage Ratio (the ratio of outstanding debt to trailing twelve-month earnings before interest, income taxes, depreciation, amortization and stock-based compensation), as more fully defined in the Credit Facility, must not be greater than 3.50:1.0, or 4.00:1.0 under a one-time request by the Company subsequent to an acquisition that meets the requirements under the Credit Facility. At September 30, 2015, this ratio was 1.41:1.

 

Minimum Consolidated Interest Coverage Ratio

 

On the last day of each fiscal quarter, the Company’s Consolidated Interest Coverage Ratio (the ratio of trailing twelve-month earnings before interest, income taxes, depreciation, amortization and stock-based compensation to cash interest expense for the same period), as more fully defined in the Credit Facility, and must not be less than 3.00:1.0. At September 30, 2015, this ratio was 17.05:1.

 

As of September 30, 2015, the Company was in compliance with these covenants.

 

Substantially all of the Company’s assets, including the capital stock and assets of wholly-owned subsidiaries, secure obligations under the Credit Facility.  

 

Equipment Financing Facilities

 

As of September 30, 2015, there was a total of $25.5 million outstanding under equipment financing facilities, with fixed interest rates ranging from 2.33% to 4.49% and payments due through September 2021. The Company’s prior equipment financing facility matured on October 1, 2014.

 

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BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

Other Information

 

Annual principal payments for all outstanding borrowings for each of the next five years and thereafter as of September 30, 2015 were as follows:

 

Fiscal year  Senior Secured
Credit
Facility
   Equipment
Financing
   Revolving
Lines of
Credit
   Total 
2016   11,250    5,069    11,240    27,559 
2017   174,375    4,974    -    179,349 
2018        4,223    -    4,223 
2019   0    4,336    -    4,336 
2020   0    4,300         4,300 
Thereafter   0    2,586    -    2,586 
Subtotal   185,625    25,488    11,240    222,353 
Less current portion   11,250    5,069    11,240    27,559 
Total long-term debt  $174,375   $20,419   $0   $194,794 

 

9. Leases

 

The Company mostly operates in leased facilities, which are accounted for as operating leases. The leases typically provide for a base rent plus real estate taxes. Certain of the leases provide for escalating rents over the lives of the leases and rent expense is recognized over the terms of those leases on a straight-line basis.

  

At September 30, 2015, the minimum rental commitments under all non-cancelable operating leases with initial or remaining terms of more than one year were as follows:

 

   Operating 
Year ending September 30,  Leases 
2016   37,303 
2017   31,064 
2018   24,382 
2019   19,200 
2020   13,215 
Thereafter   23,939 
Total minimum lease payments  $149,103 

 

Rent expense was $39,248 in 2015, $34,854 in 2014, and $32,736 in 2013. Sublet income was immaterial for these years.

 

10. Stock Options and Restricted Stock Awards

 

On February 12, 2014, the shareholders of the Company approved the Beacon Roofing Supply, Inc. 2014 Stock Plan (the “2014 Plan”). The 2014 Plan provides for discretionary awards of stock options, stock, stock units and stock appreciation rights (“SARs”) for up to 5,100,000 shares of common stock to selected employees and non-employee directors. As of September 30, 2015, there were 3,537,929 shares of common stock available for awards under the 2014 Plan, subject to increase for shares that are forfeited or expire, or are used for tax withholding on stock awards or stock unit awards, under the 2004 (defined below) and the 2014 Plan.

 

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BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

Prior to the 2014 Plan, the Company maintained the amended and restated Beacon Roofing Supply, Inc. 2004 Stock Plan (the “2004 Plan”). Upon shareholder approval of the 2014 Plan, the Company ceased issuing equity awards from the pre-existing 2004 Plan and all future equity awards will be issued from the 2014 Plan.

 

The Company recognizes the cost of employee services rendered in exchange for awards of equity instruments based on the fair value of those awards at the date of the grant. Compensation expense for time-based equity awards is recognized, on a straight-line basis, net of forfeitures, over the requisite service period for the fair value of the awards that actually vest. Compensation expense for performance-based equity awards is recognized, net of forfeitures, by projecting the number of restricted units that are expected to vest based on the achievement of the underlying related performance measures.

 

In 2014, the Company recorded an adjustment of $2.4 million during the third quarter and an additional $0.2 million during the fourth quarter to reverse stock-based compensation expense recorded in the current and prior periods for previously issued performance-based equity awards. In accordance with the provisions of the 2004 Plan, the Company has adjusted the projection for the number of restricted units that are expected to vest based on the achievement of the underlying related performance measures. In 2015, the Company recorded stock-based compensation expense for award grants of $9.9 million for the year ended September 30, 2015, and $7.4 million and $9.3 million for the years ended September 30, 2014 and 2013, respectively.

 

Stock Options

 

As of September 30, 2015, there were a total of 2,410,907 options outstanding, 1,528,873 of which are exercisable, at a weighted-average exercise price of $20.78. Non-qualified options generally expire 10 years after the grant date and, except under certain conditions, the options are subject to continued employment and vest in one-third increments over a three-year period following the grant dates. As of September 30, 2015, there was $5.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.56 years.

 

The fair values of the options were estimated on the dates of grants using the Black-Scholes option-pricing model with the following weighted-average assumptions:

 

   Year ended September 30, 
   2015   2014   2013 
Risk-free interest rate   1.83%   1.76%   0.60%
Expected volatility   31.69%   44.00%   43.80%
Expected life in years   5.6    6.0    5.7 
Dividend yield   -    -    - 

 

 

Expected lives of the options granted are based primarily on historical activity, while expected volatilities are based on historical volatilities of the Company’s stock and consideration of comparable public companies’ stock.

 

In the event of a change in control of the Company, all outstanding options and restricted stock units outstanding prior to fiscal year ended 2015 will be immediately vested.

 

Beginning in fiscal 2015, options and stock units contain a “double trigger” change in control mechanism. Unless an award is continued or assumed by a public company in an equitable manner, an award shall become fully vested immediately prior to a change in control (at 100% in the case of a performance-based award). If an award is so continued or assumed, vesting will continue in accordance with the terms of the award, unless there is a qualifying termination within one-year following the change in control, in which event the award shall become fully vested immediately (at 100% in the case of a performance-based award).

 

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BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

Information regarding the Company’s stock options is summarized below:

 

           Weighted-     
       Weighted-   Average     
       Average   Remaining   Aggregate 
   Number of   Exercise   Contractual   Intrinsic 
   Shares   Price   Life   Value 
           (in years)   (in millions) 
Outstanding at September 30, 2014   2,364,211   $22.98           
Granted   483,479    28.59           
Exercised   (350,747)   18.46           
Canceled   (86,036)   29.72           
                     
Outstanding at September 30, 2015   2,410,907   $24.55    6.3   $20.7 
                     
Vested or Expected to Vest at September 30, 2015   2,300,160   $24.28    6.2   $20.4 
                     
Exercisable at September 30, 2015   1,528,873   $20.78    5.1   $18.5 

 

The total fair value of options vested was $6.4 million, $6.7 million, and $5.8 million during 2015, 2014, and 2013, respectively. The total intrinsic value of stock options exercised during 2015, 2014 and 2013 was $4.6 million, $7.9 million, and $22.0 million, respectively. Intrinsic values are before applicable income taxes and represent the amount by which the market value of the underlying stock exceeded the exercise price of outstanding options on the last business day of the period indicated. The weighted-average grant date fair value price of options granted during 2015, 2014, and 2013 was $9.40, $15.97, and $13.42, respectively.

 

Restricted Stock Unit Awards

 

As of September 30, 2015, there was $7.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested restricted stock awards which are expected to be recognized over a weighted-average period of 2.20 years.

 

The total fair values of the restricted stock awards were determined based upon the number of units and the closing prices of the Company’s common stock on the dates of the grants. The restricted stock unit awards granted to management are subject to continued employment, except under certain conditions, and will vest if the Company attains a targeted rate of return on invested capital at the end of a three-year period. The actual number of units that will vest can range from 0% to 125% of the management grants depending upon actual Company performance below or above the target level and the Company estimates that performance in determining the projected number of shares or units that will vest and the related compensation cost. The restricted stock awards granted to non-employee directors are also subject to continued service, vest at the end of one year (except under certain conditions) and the underlying common shares will not be distributed until six months after the director separates from the Company. Beginning in 2014, the six month period was eliminated and shares will be delivered within ten days after termination of service on the board. In November 2013 and 2014, the Company has also issued restricted stock unit awards that are subject to continued employment and will vest over three to five years.

 

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BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

Information regarding the Company’s restricted stock units is summarized below:

 

         
       Weighted- 
       Average 
   Number of   Grant 
   Shares   Price 
         
Outstanding at September 30, 2014   482,076   $31.28 
Granted   229,265    28.74 
Lapse of restrictions/conversions   (67,953)   19.88 
Canceled   (23,389)   21.73 
           
Outstanding at September 30, 2015   619,999   $31.95 
           
Vested or Expected to Vest at September 30, 2015   448,924   $31.43 

 

The total fair value of restricted stock units vested was $2.3 million, $1.2 million, and $0.8 million during 2015, 2014, and 2013, respectively.

 

11. Benefit Plans

 

The Company maintains defined contribution plans covering all full-time employees of the Company who have 90 days of service and are at least 21 years old. An eligible employee may elect to make a before-tax contribution of between 1% and 100% of his or her compensation through payroll deductions, not to exceed the annual limit set by law. The Company currently matches the first 50% of participant contributions limited to 6% of a participant’s gross compensation (maximum Company match is 3%). Furthermore, in accordance with the plans, the Company may elect to make additional contributions to eligible employees as part of a discretionary profit-sharing. The Company has elected to do so during each of the three years presented and is scheduled to make a contribution for 2015 during the 2016 fiscal year. All Company contributions are subject to the discretion of management and the board of directors. The combined total expense for this plan and a similar plan for Canadian employees was $4,629, $6,003, and $4,921, in 2015, 2014 and 2013, respectively.

 

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BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

The Company also contributes to an external pension fund for certain of its employees who belong to a local union. Annual contributions were $135, $136, and $133 in 2015, 2014, and 2013, respectively.

 

12. Income Taxes

 

The income tax provision consisted of the following:

 

   Year ended September 30, 
   2015   2014   2013 
Current:               
Federal  $17,414   $25,988   $34,364 
Foreign   1,765    1,383    1,895 
State   7,579    4,473    8,192 
    26,758    31,844    44,451 
Deferred:               
Federal   14,798    2,327    3,855 
Foreign   (657)   (648)   (493)
State   2,868    1,399    1,054 
    17,009    3,078    4,416 
   $43,767   $34,922   $48,867 

 

The following table shows the principal reasons for the differences between the effective income tax rate and the statutory federal income tax rate:

 

   Year ended September 30, 
   2015   2014   2013 
             
Federal income taxes at statutory rate   35.00%   35.00%   35.00%
State income taxes, net of federal benefit   4.63    4.24    4.95 
Non-deductible professional fees related to RSG acquisition   2.15   -    - 
Other   (0.51)   0.10    0.28 
Total   41.27%   39.34%   40.23%

 

Deferred income taxes reflect the tax consequences of temporary differences between the amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax law. These temporary differences are determined according to ASC 740 Income Taxes. Temporary differences that give rise to deferred tax assets and liabilities are as follows (in thousands):

 

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BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

   September 30,   September 30, 
   2015   2014 
Deferred tax liabilities:          
Excess tax over book depreciation and amortization  $(79,924)  $(72,670)
Inventory Valuation   (2,511)     
Other   (615)   (527)
    (83,050)   (73,197)
Deferred tax assets:          
Deferred compensation   11,622    9,095 
Allowance for doubtful accounts   569    2,956 
Accrued vacation & other   3,515    3,194 
Unrealized loss on financial derivatives   844    753 
Inventory valuation   0    7,709 
    16,550    23,707 
Net deferred income tax liability  $(66,500)  $(49,490)
           
Net deferred income tax asset (liability) – Current  $2,309   $14,610 
Net deferred income tax asset (liability) – Non-current  $(68,809)  $(64,100)

 

The Company’s Canadian subsidiary, Beacon Roofing Supply Canada Company (“BRSCC”), is treated as a Controlled Foreign Corporation (“CFC”). BRSCC’s taxable income, which reflects all of the Company’s Canadian operations, is being taxed only in Canada and would generally be taxed in the United States only upon an actual or deemed distribution. The Company expects that BRSCC’s earnings will be indefinitely reinvested for the foreseeable future and therefore no United States deferred tax asset or liability for the differences between the book basis and the tax basis of BRSCC has been recorded at September 30, 2015.  Unremitted earnings of $38.8 million were considered permanently reinvested at September 30, 2015. Of this amount, $22.4 million of the unremitted earnings were previously taxed in the United States and the remittance on these earnings would not generate additional United States tax.

 

As of September 30, 2015 and 2014, there were no available tax benefits related to foreign tax credit carry-forwards.

 

As of September 30, 2015, goodwill was $496,415, of which $322,932 can be amortized for income tax purposes.

 

As of September 30, 2015, there was $82 of uncertain tax positions which, if recognized, would affect the Company’s effective tax rate. The Company’s continuing practice is to recognize any interest and penalties related to income tax matters in income tax expense in the consolidated statements of operations. A reconciliation of the beginning and ending amounts of the gross unrecognized income tax benefits is as follows:

 

   Year Ended September 30, 
   2015   2014 
Balance, beginning of year  $82   $364 
Current year uncertain tax positions   -    - 
Settlements   0    (282)
Balance, end of year  $82   $82 

 

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BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

The Company has operations in 42 U.S. states and six provinces in Canada. The company is currently under audit by the Internal Revenue Service for the tax year ended September 30, 2013 and in certain state and local jurisdictions for various years. These audits may involve complex issues, which may require an extended period of time to resolve. The Company has provided for its estimate of taxes payable in the accompanying financial statements. Additional taxes are reasonably possible, however the amounts cannot be estimated at this time. The Company is no longer subject to U.S. federal income tax examinations for the fiscal year ended prior to September 30, 2012. For the majority of states, the Company is also no longer subject to tax examinations for fiscal years ended before September 30, 2012. In Canada, the Company is no longer subject to tax examinations for fiscal years ended prior to September 30, 2011. For the Canadian provinces, the Company is no longer subject to tax examinations for fiscal years ended before September 30, 2012.

 

13. Contingencies

 

The Company is subject to loss contingencies pursuant to various federal, state and local environmental laws and regulations; however, the Company is not aware of any reasonably possible losses that would have a material impact on its results of operations, financial position, or liquidity. Potential loss contingencies include possible obligations to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical or other substances by the Company or by other parties. In connection with its acquisitions, the Company has been indemnified for any and all known environmental liabilities as of the respective dates of acquisition. Historically, environmental liabilities have not had a material impact on the Company's results of operations, financial position or liquidity.

 

The Company is subject to litigation from time to time in the ordinary course of business; however the Company does not expect the results, if any, to have a material adverse impact on its results of operations, financial position or liquidity.

 

14. Geographic and Product Data

 

The Company’s geographic and product information was as follows:

 

   Year Ended September 30, 
   2015   2014   2013 
           Long           Long           Long 
       Income   Lived       Income   Lived       Income   Lived 
   Net   before   Assets,   Net   before   Assets,   Net   before   Assets, 
   Revenues   taxes   net   Revenues   taxes   net   Revenues   taxes   net 
U.S.  $2,331,360   $101,956   $81,767   $2,146,356   $86,875   $78,609   $2,064,135   $116,853   $58,399 
Canada   183,809    4,087    8,638    180,549    1,893    9,956    176,588    4,621    9,260 
Total  $2,515,169   $106,043   $90,405   $2,326,905   $88,768   $88,565   $2,240,723   $121,474   $67,659 

 

Net revenues from external customers by product group were as follows:

 

   Year Ended September 30, 
   2015   2014   2013 
Residential roofing products  $1,236,397   $1,108,516   $1,100,508 
Non-residential roofing products   882,970    876,032    822,726 
Complementary building products   395,802    342,357    317,489 
Total  $2,515,169   $2,326,905   $2,240,723 

 

Prior year revenues by product group are presented in a manner consistent with the current year’s product classifications.

 

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BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

15. Allowance for Doubtful Accounts

 

The activity in the allowance for doubtful accounts consisted of the following:

 

   Balance at             
   beginning   Provision       Balance at 
Fiscal Year  of year   Additions   Write-offs   end of year 
September 30, 2015  $8,510   $1,619   $(3,831)  $6,298 
September 30, 2014  $9,832   $2,394   $(3,716)  $8,510 
September 30, 2013  $13,464   $369   $(4,001)  $9,832 

 

16. Financial Derivatives

 

Market risk represents the possibility that the value of the derivative instrument will change. In a hedging relationship, the change in the value of the derivative is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to derivatives represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of derivative financial instrument is used to measure interest to be paid or received and does not represent the Company’s exposure due to credit risk. The Company’s current derivative instruments are with large financial counterparties rated highly by nationally recognized credit rating agencies.

 

The Company uses interest rate derivative instruments to manage the risk related to fluctuating cash flows from interest rate changes by converting a portion of its variable-rate borrowings into fixed-rate borrowings. On March 28, 2013, we entered into an interest rate swap agreement with a notional amount of $213.8 million which expires on March 31, 2017. This agreement swaps the thirty-day LIBOR to a fixed-rate of 1.38%. The instrument has scheduled reductions of the notional amount equal to $2.8 million per quarter, effectively matching the repayment schedule under the Term Loan. As of September 30, 2015, the interest rate swap has a notional amount of $185.6 million.

 

For derivative instruments designated as cash flow hedges, the Company records the effective portions of changes in their fair value, net of taxes, in other comprehensive income. The effectiveness of the hedges is periodically assessed by the Company during the lives of the hedges by 1) comparing the current terms of the hedges with the related hedged debt to assure they continue to coincide and 2) through an evaluation of the ability of the counterparties to the hedges to honor their obligations under the hedges. Any ineffective portions of the hedges are recognized in earnings through interest expense, financing costs and other. Subsequent changes in the fair value of those swaps are also being recognized in interest expense, financing costs and other.

 

The Company records any differences paid or received on its interest rate hedges as adjustments to interest expense, financing costs and other. The table below presents the combined fair values of the interest rate derivative instruments:

 

      Unrealized Losses    
   Location on  September 30,   September 30,   Fair Value
Instrument  Balance Sheet  2015   2014   Hierarchy
      (dollars in thousands)    
Designated interest rate swaps (effective)  Accrued expenses  $2,358   $2,124   Level 2

 

The fair value of the interest rate hedge was determined through the use of a pricing model, which utilizes verifiable inputs such as market interest rates that are observable at commonly quoted intervals (generally referred to as the “LIBOR Curve”) for the full terms of the hedge agreements. These values reflect a Level 2 measurement under the applicable fair value hierarchy.

 

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BEACON ROOFING SUPPLY, INC.

 

Notes to Consolidated Financial Statements

Year Ended September 30, 2015

(dollars in thousands, except per share data or otherwise indicated)

 

The table below presents the amounts of gain (loss) on the interest rate derivative instrument recognized in other comprehensive income (OCI):

 

   2015   2014   2013 
(dollars in thousands)            
Amount of Gain (Loss) Recognized in OCI (net of tax)               
Designated interest rate swaps  $(138)  $972   $1,399 
Non-designated interest rate swaps (reclassified from accumulated OCI)   -    -    - 

  

We did not have any gain or loss amounts on the interest rate derivative instruments recognized in interest expense, financing costs, and other for the years ended September 30, 2015 and 2014, and $7,000 in 2013.

 

17. Subsequent Events

 

On July 27, 2015, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) to acquire Roofing Supply Group, LLC (“RSG”), a leading roofing products distributor owned by an investment partnership controlled by Clayton, Dubilier & Rice, LLC and employee stockholders, in a cash and stock transaction valued at approximately $1.1 billion. Headquartered in Dallas, Texas, RSG distributes roofing supplies and related materials from 83 locations across 24 states, including the key Western and Southern markets of California, Florida, Texas, and the Pacific Northwest with branches in Seattle and Spokane.

 

On October 1, 2015, the Company completed the RSG acquisition. The aggregate consideration paid by the Company to consummate the acquisition consisted of (i) approximately $285.5 million in cash payable to RSG’s stockholders and optionholders, (ii) 9.04 million shares of Company common stock issuable to RSG’s stockholders and optionholders, (iii) substitute Company options in exchange for approximately 862,400 RSG options, and (iv) $601.8 million for repayment of RSG’s outstanding indebtedness and assumed RSG capital leases. The Company funded the cash portion of the consideration through the October 1, 2015 issuance of, $300 million aggregate principal amount of 6.375% Senior Notes due 2023, and borrowings under a $450 million Term Loan B LIBOR based facility due 2022 and a $700 million asset based lending revolving credit facility. On October 1, 2015, the Company also paid off debt of C$15.2 million ($11.4 million) and $186.7 million principal and interest outstanding under the previous Canadian Revolver and Term Loan, respectively as well as $2.4 million owed under related interest rate derivative instruments.

 

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.    CONTROLS AND PROCEDURES

 

1.Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2015. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of September 30, 2015, our disclosure controls and procedures were (1) designed to ensure that material information relating to Beacon Roofing Supply, Inc., including its consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) designed to be effective, and were effective, in that they provide reasonable assurance of achieving their objectives, including that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures.

 

2.Internal Control over Financial Reporting

 

(a)Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

·Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

 

·Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

 

·Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

   

Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations which may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal controls over financial reporting as of September 30, 2015. In making this assessment, we used the criteria set forth in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Based on our assessment, we believe that, as of September 30, 2015, our internal control over financial reporting is effective at the reasonable assurance level based on those criteria.

 

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Our Independent Registered Public Accounting Firm has issued a report on the Company’s internal control over financial reporting. This report appears below.

 

(b)Attestation Report of the Independent Registered Public Accounting Firm

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders of

Beacon Roofing Supply, Inc.

 

We have audited Beacon Roofing Supply, Inc.’s internal control over financial reporting as of September 30, 2015, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Beacon Roofing Supply, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Beacon Roofing Supply, Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2015, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Beacon Roofing Supply, Inc. as of September 30, 2015 and 2014 and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2015 and our report dated November 24, 2015 expressed an unqualified opinion thereon.

 

    /s/ ERNST & YOUNG LLP
McLean, Virginia    
November 24, 2015    

 

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(c)Changes in Internal Control Over Financial Reporting

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B.    OTHER INFORMATION

 

We have no information to report pursuant to Item 9B.

 

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PART III

 

This part of our Form 10-K, which includes Items 10 through 14, is omitted because we will file definitive proxy material pursuant to Regulation 14A not more than 120 days after the close of our year-end, which proxy material will include the information required by Items 10 through 14 and is incorporated herein by reference.

 

PART IV

 

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)(1)Financial Statements

 

The following financial statements of our Company and Report of the Independent Registered Public Accounting Firm are included in Part II, Item 8 of this Report:

 

·Report of Independent Registered Public Accounting Firm

 

·Consolidated Balance Sheets as September 30, 2015 and 2014

 

·Consolidated Statements of Operations for the years ended September 30, 2015, 2014 and 2013

 

·Consolidated Statements of Comprehensive Income for the years ended September 30, 2015, 2014 and 2013

 

·Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2015, 2014 and 2013

 

·Consolidated Statements of Cash Flows for the years ended September 30, 2015, 2014 and 2013

 

·Notes to Consolidated Financial Statements

 

(2)    Financial Statement Schedules

 

Financial statement schedules have been omitted because they are either not applicable or the required information has been disclosed in the financial statements or notes thereto.

 

(3)    Exhibits

 

Exhibits are set forth on the attached exhibit index.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  BEACON ROOFING SUPPLY, INC. (REGISTRANT)
     
  By: /s/   JOSEPH M. NOWICKI
    Joseph M. Nowicki
    Executive Vice President and Chief Financial Officer
Date: November 24, 2015    

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

SIGNATURE   TITLE   DATE
         
/s/   ROBERT R. BUCK   Chairman   November 24, 2015
Robert R. Buck        
         
/s/   PAUL M. ISABELLA   President and Chief Executive Officer   November 24, 2015
Paul M. Isabella        
         
/s/   JOSEPH M. NOWICKI   Executive Vice President and Chief Financial Officer   November 24, 2015
Joseph M. Nowicki        
         
/s/   JEANINE MONTGOMERY   Chief Accounting Officer   November 24, 2015
Jeanine Montgomery        
         
/s/   RICHARD W. FROST   Director   November 24, 2015
Richard W. Frost        
         
/s/   JAMES J. GAFFNEY   Director   November 24, 2015
James J. Gaffney        
         
/s/   PETER M. GOTSCH   Director   November 24, 2015
Peter M. Gotsch        
         
/s/   NEIL S. NOVICH   Director   November 24, 2015
Neil S. Novich        
         
/s/   STUART A. RANDLE   Director   November 24, 2015
Stuart A. Randle        
         
/s/   WILSON B. SEXTON   Director   November 24, 2015
Wilson B. Sexton        
         
/s/ DOUGLAS L. YOUNG   Director   November 24, 2015
Douglas L. Young        
         
/s/   ALAN GERSHENHORN   Director   November 24, 2015
Alan Gershenhorn        
         
/s/  PHILIP W. KNISELY   Director   November 24, 2015
Philip W. Knisely        
         
/s/   NATHAN K. SLEEPER   Director   November 24, 2015
Nathan K. Sleeper        

 

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INDEX TO EXHIBITS

 

        Incorporated by Reference
Exhibit
Number
  Description   Form   File No.   Exhibit   Filing Date
2.1   Agreement and Plan of Merger, dated as of July 27, 2015 by and among CDDR Investors Inc., Beacon Roofing Supply, Inc., Beacon Leadership Acquisition I, Inc., and Beacon Leadership Acquisition II, LLC   8-K   000-50924   2.1   July 27, 2015
                     
3.1   Second Amended and Restated Certificate of Incorporation of Beacon Roofing Supply, Inc.   10-K   000-50924   3.1   December 23, 2004
                     
3.2   Amended and Restated By-Laws of Beacon Roofing Supply, Inc.   8-K   000-50924   3.1   September 24, 2014
                     
4.1   Form of Specimen Common Stock Certificate of Beacon Roofing Supply, Inc.   S-1/A   333-116027   4.1   August 19, 2004
                     
4.2   Indenture, dated as of October 1, 2015, by and among Beacon Roofing Supply, Inc., the subsidiary guarantors party thereto, and U.S. Bank National Association, as trustee.   8-K   000-50924  

4.1

  October 1, 2015
                     
4.3   Supplemental Indenture, dated as of October 1, 2015, by and among Beacon Roofing Supply, Inc. (“Beacon”), certain direct and indirect subsidiaries of Beacon, as additional subsidiary guarantors, and U.S. Bank National Association, as trustee.  

8-K

 

000-50924

  4.2  

October 1, 2015

                     
4.4   Form of 6.375% Senior Notes due 2023 (included as Exhibit A to the Indenture incorporated by reference as Exhibit 4.2).  

8-K

 

000-50924

  4.3  

October 1, 2015

                     
10.1   Credit Agreement, dated as of April 5, 2012, among Beacon Sales Acquisition, Inc. and Beacon Roofing Supply Canada Corporation, as borrowers, Beacon Roofing Supply, Inc., as one of the Guarantors, the Lenders party thereto, and Wells Fargo Securities, LLC, as Administrative Agent.   8-K   000-50924   10   April 5, 2012
                     
10.2   Executive Securities Agreement dated as of October 20, 2003 by and between Beacon Roofing Supply, Inc., Robert Buck and Code, Hennessy & Simmons III, L.P.   S-1   333-116027   10.5   May 28, 2004
                     
10.3+   Description of Management Cash Bonus Plan   10-Q   000-50924   10   February 8, 2013
                     
10.4+   Beacon Roofing Supply, Inc. Amended and Restated 2004 Stock Plan   DEF 14A   000-50924   Appendix A   January 7, 2011
                     
10.5+   First Amendment dated as of October 31, 2011 to the Beacon Roofing Supply, Inc. 2004 Stock Plan   10-K   000-50924   10.1   November 29, 2011
                     
10.6+   Beacon Roofing Supply, Inc. 2014 Stock Plan   DEF 14A   000-50924   Appendix A   January 6, 2014
                     
10.7*+   First Amendment effective on August 12, 2015 to Beacon Roofing Supply Inc. 2014 Stock Plan                

 

 

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10.8+   Form of Beacon Roofing Supply, Inc. 2014 Stock Plan Restricted Stock Unit Award Agreement for Non-Employee Directors   8-K   000-50924   10.2   February 13, 2014
                     
10.9+   Form of Beacon Roofing Supply, Inc. 2014 Stock Plan Restricted Stock Unit Award Agreement for Employees   8-K   000-50924   10.1   September 23, 2014
                     
10.10+   Form of Beacon Roofing Supply, Inc. 2014 Stock Plan Time-Based Restricted Stock Unit Award Agreement for Employees   8-K   000-50924   10.2   September 23, 2014
                     
10.11+   Form of Beacon Roofing Supply, Inc. 2014 Stock Plan Stock Option Agreement   8-K   000-50924   10.3   September 23, 2014
                     
10.12   Investment Agreement, dated as of July 27, 2015, by and between Beacon Roofing Supply, Inc., and CD&R Roadhouse Holdings, L.P.   8-K   000-50924   10.1   July 27, 2015
                     
21*   Subsidiaries of Beacon Roofing Supply, Inc.                
                     
23.1*   Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm                
                     
31.1*   CEO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                
                     
31.2*   CFO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                
                     
32.1*   CEO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                
                     
32.2*   CFO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                
                     
101*   101.INS XBRL Instance                
    101.SCH XBRL Taxonomy Extension Schema                
    101.CAL XBRL Taxonomy Extension Calculation                
    101.LAB XBRL Taxonomy Extension Labels                
    101.PRE XBRL Taxonomy Extension Presentation                
    101.DEF XBRL Taxonomy Extension Definition                

 

 

+Management contract or compensatory plan/arrangement
*Filed herewith

 

We will furnish any of our shareowners a copy of any of the above Exhibits not included herein upon the written request of such shareowner and the payment to Beacon Roofing Supply, Inc. of the reasonable expenses incurred in furnishing such copy or copies.

 

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